* Mexico "close" to an interest rate hike unless inflation
* Central bank will act if price spike hits inflation
By Luis Rojas and Michael O'Boyle
MEXICO CITY, Oct 30 Mexico's central bank is
getting close to tightening borrowing costs if inflation does
not cool in the coming months and threatens future expectations
on consumer prices, central bank chief Agustin Carstens said on
The central bank held its benchmark interest rate steady at
4.50 percent last week though policymakers said they could
tighten monetary policy soon for the first time in four years if
price pressures do not abate.
A jump in some fresh food prices drove Mexico's annual
inflation rate further and further above the central bank's 4
percent limit for four months in a row but the rate fell in the
first half of October.
Carstens said it was "very likely" that inflation had peaked
and would cool in the coming months.
"If those changes in the trend that we have just started to
see do not consolidate, then it would be necessary to use the
central bank's monetary instruments," Carstens said at an event
in Mexico City.
Yields on interest rate swaps edged up following
his comments as the market priced in a greater chance for an
interest rate hike next year.
The market bolstered bets on a hike next year after last
week's statement, the most hawkish since Agustin Carstens took
the helm of the central bank in January 2010.
Mexico's key interest rate has held steady since July 2009
after it was cut amid a deep recession.
Inflation in Mexico has been fueled most by volatile fresh
food prices, including a spike in egg prices following an avian
flu outbreak. The annual rate rose to 4.77 percent in September,
but then dipped to 4.64 percent in early October.
Carstens said higher interest rates were not an "optimal"
instrument to fight transitory price changes, such as volatile
food costs. However, he said that repeated price shocks could
affect inflation expectations and spur price contagion.
"When this danger increases it is appropriate that the
central send a signal and, really, we are getting close to that
point, unless inflation starts to fall again," Carstens said.
So far, there has not been a sharp increase in mid-term
At the start of June, before data showed inflation rose
above 4 percent, analysts projected the annual rate for 2013 at
3.65 percent, according to the central bank's monthly poll of
analysts. By October, 2013 estimates had risen to 3.76 percent.
Banco de Mexico, which has an inflation target of 3 percent,
with a one percentage point tolerance band, said last week that
recent gains in the peso should help cool Mexican inflation.
Slower growth is also expected to keep a lid on price
pressures. Mexico's economy grew an average 4.3 percent in
annual terms in the first half of the year, but the finance
ministry is forecasting a more moderate expansion of 3.5 percent
to 4.0 percent for the whole of 2012.
The yield on Mexico's 2-year interest rate swap
bid up 2 basis points to 5.06 percent.
"Rates got pressured with the comment that if the (declining
inflation) trend does not consolidate it would be necessary to
use monetary policy instruments, meaning increase rates," said a
debt trader in Mexico City.