MEXICO CITY Jan 29 Mexico's central bank is
expected to hold interest rates steady at a record low on
Thursday as it balances a drop in inflation against a sharp
slump in the peso that could fan consumer prices higher.
Nineteen of 20 analysts polled by Reuters expect the Banco
de Mexico to hold its benchmark rate at 3 percent
in its first policy decision statement at 1 p.m. local time
(1900 GMT) on Thursday instead of the previous release time on
Annual inflation slowed sharply in early January to just
above 3 percent after running above the central bank's 4 percent
ceiling for acceptable price gains last year.
The drop in inflation, combined with slack Mexican growth
data this week and a flood of liquidity from the European
Central Bank last week, pushed economists at Capital Economics
to expect a 25 basis point cut this Thursday.
"It is worth noting that previous rate cuts in Mexico have
come as a surprise and that could be the case again this month,"
economist David Rees wrote in a report on Wednesday. Last week,
he had expected Mexico to hold rates steady this week.
However, Mexico's peso slumped nearly 12
percent in the fourth quarter to its weakest against the dollar
in nearly 6 years. While it has recovered slightly, the sharp
drop could push vendors to raise prices this year.
"We caution that the foreign exchange pass-through will gain
importance in the coming months," wrote Nomura economist Benito
Berber, who said a surprise cut would hurt the peso and increase
the risk to inflation.
Policymakers held borrowing costs steady last month and
flagged risks to consumer prices from the peso, which suffered
as global oil prices tumbled.
Mexican central bank governor Agustin Carstens said earlier
this month that Mexico will probably have to raise interest
rates this year, given the Federal Reserve's own expected hike
in U.S. borrowing costs.
The Fed on Wednesday said the U.S. economy was expanding "at
a solid pace" with strong job gains in a signal that the central
bank remains on track with its plans to raise interest rates
Analysts polled by Reuters expect an initial 25 basis point
hike in Mexico during the third quarter, with further increases
taking borrowing costs up to 4.5 percent by the third quarter of
(Reporting by Michael O'Boyle; Editing by Bernard Orr)