* Interest rates remain on hold at 4.0 percent
* Central bank says risks to economic growth intensified
* Annual inflation cools slightly in May to 4.63 percent
By Michael O'Boyle
MEXICO CITY, June 7 Mexico's central bank held
interest rates at a record low on Friday as growing expectations
for the Federal Reserve to ease back on stimulus undermined
arguments for lower Mexican borrowing costs.
Policymakers are balancing what they described as deeper
risks to economic growth against a spike in inflation that
overshot the central bank's ceiling for a third month in May.
The Banco de Mexico kept its benchmark interest rate
steady at 4.0 percent, in line with forecasts in a
Reuters poll, and said the stance was in line with expectations
that price pressures would not spread.
The central bank said it expected annual inflation, which
was reported earlier on Friday at 4.63 percent in May, to turn
down in June and slide quickly below policymakers' 4 percent
limit in the second half of the year.
The central bank also said recent weakness in the country's
peso currency could persist, backing away from concerns
in April that financial flows to Mexico could push the peso too
"As a reflection of possible changes in monetary policy in
the United States, volatility in the exchange rate could
continue, although the strong fundamentals of the Mexican
economy will tend to order its behavior in the medium term," the
central bank said in a statement accompanying its decision.
Mexico's peso was hammered in May along with other emerging
market assets as convictions grew that the Federal Reserve could
begin easing back its monetary stimulus later this year, a move
that would strengthen the dollar.
"People had speculated that one of the reasons the bank
could cut the interest rate was to deter the appreciation of the
peso," said Ezequiel Aguirre, a strategist at Bank of America.
"They are not worried about the peso at its current levels."
After a 7 percent slump in the peso last month, economists
have warned of the risk to inflation should foreign investors
pull out of Mexican assets and weaken the currency further,
pushing up import prices.
Markets in May began pricing in a withdrawal of Fed stimulus
later this year, driving up yields on Mexican bonds and interest
rate swaps and wiping out bets on another 50 basis
point cut by Banxico around September.
"The are going to avoid exacerbating the situation of peso
weakness, so they have removed this sense that rates could go
lower," said Enrique Alvarez, an analyst at IDEAglobal.
Still, some analysts said the bank was still likely to cut
interest rates if growth slows in Mexico and the United States,
which could keep Fed stimulus steady.
The central bank took advantage of a brief window of low
inflation early this year to cut its benchmark rate for the
first time in nearly four years in March to a new record low in
what was seen as a bid to reduce the appeal of local assets.
The May figures showed even though fresh food prices fell
in the month, they were again the main driver of annual
inflation, up more than 15 percent from the same time last year.
Headline consumer prices fell 0.33 percent in
May, from a 0.07 percent rise in April and broadly in line with
the 0.3 percent dip expected in a Reuters poll.
The core price index, which strips out some
volatile food and energy prices, rose 0.2 percent in the month,
in line with expectations.
Non-food core goods inflation, the most sensitive to
currency fluctuations, and core services prices, a key gauge of
home-grown price pressures, both eased, the figures showed.