* Banco de Mexico holds rate at 4 percent, as expected
* Says inflation hump is temporary, eyes weaker growth
* Policymakers worried about surge in inflows, peso strength
By Krista Hughes and Michael O'Boyle
MEXICO CITY, April 26 Mexico's central bank on
Friday brushed off a recent pickup in inflation, keeping the
door ajar for a possible further relaxation in credit costs if
easy-money policies in advanced economies fans capital inflows.
The Banco de Mexico held its benchmark rate at a record low
of 4 percent, as expected in a Reuters poll, after it cut
borrowing costs for the first time in nearly four years in
Markets are pricing in a good chance of another 25 basis
point cut in the second half of the year, when inflation is
forecast to decline, and the bank's statement backed views that
a stronger currency is becoming an increasing concern.
Central bank governor Agustin Carstens ruled out capital
controls to temper inflows but said resuming auctions of dollar
put options might be an option in the future.
Policymakers said a spike in consumer prices that took
inflation above the central bank's ceiling in March and early
April was transitory and said they saw no broad price pressures.
They also highlighted the risk a U.S. economic slowdown could
"Going forward, the board will continue monitoring all
factors that could affect inflation," the central bank said in a
statement accompanying the decision.
They pointed to the risk of knock-on effects from higher
fresh food prices but also to the risk that ultra-easy monetary
policies around the world could effectively put the brakes on
Mexico has absorbed $160 billion in new foreign investment
in its financial markets in the last three years, pushing stocks
and bonds to record highs. Analysts say stimulus by the
Bank of Japan could spur fresh inflows.
"Banxico (Banco de Mexico) has to keep proving that it is,
at the end of the day, an inflation targeter, and so has to
sound cautious, but clearly their main worry is about capital
flows," said JPMorgan economist Gabriel Lozano.
If the peso, which has already gained 6 percent this
year, continues to appreciate and if inflation subsides as the
bank projects, Lozano said there was a chance of more easing.
Attending a banking conference in Acapulco, Carstens said
that the peso was still undervalued compared to before the 2008
But he said optimism about the government's drive to pass
big economic reforms could fuel more gains and he added that
policymakers would need to be vigilant if inflows surge. A
too-strong peso could hobble local exporters.
"We are in a floating (exchange rate) regime, if we really
continue with big success, well it is probable that the exchange
rate will tend to appreciate," he said in a radio interview.
Carstens added that the central bank would likely accumulate
another $20 billion in international reserves this year on top
of current levels worth nearly $166 billion.
The stronger currency does help keep a lid on inflation by
capping the price of imported goods. Annual inflation
accelerated to a seven-month high of 4.72 percent in early
April, although the central bank said it should start to cool in
June and be between 3 percent and 4 percent in the second half
of the year.
Banco de Mexico targets inflation of 3 percent, with a one
percentage point tolerance zone either side.
Mexico's strong currency contrasts with recent weak data
suggesting economic growth slowed in the first quarter of 2013,
after picking up at the end of 2012.
Retail sales fell in February by the most in 3-1/2 years and
industrial output growth slowed. The trend continued in March,
with the jobless rate rising and consumer confidence and factory
activity deteriorating for the third month running.
But exports are holding up: separate data on Friday showed
factory exports rose in March for the second month in a row,
bolstered by a strong rise in auto exports.