(Adds market reaction, central bank and economist comments)
MEXICO CITY, April 25 Mexico's central bank kept
interest rates on hold on Friday, noting tame price pressures
and highlighting signs of improving economic growth that bode
for steady borrowing costs ahead.
The Banco de Mexico maintained its benchmark interest rate
at a record low of 3.50 percent, as expected by
analysts polled by Reuters.
The central bank said growth in the United States, Mexico's
top trading partner, was getting stronger. Policymakers pointed
to rising Mexican exports and higher public spending that
suggested the economy was improving after a weak start of the
"Downside risks to economic activity growth remain, though
the balance of these improved marginally," the bank said in a
Mexican annual inflation eased for the third month in a row
in early April and policymakers are seen holding rates steady
into next year, in contrast with top regional economy Brazil
which has raised interest rates to fight inflation.
Yields on shorter-term Mexican interest rate swaps
ticked up as traders were surprised by the more optimistic tone
of the central bank, analysts said. Investors firmed bets on a
25 basis point interest rate hike in March 2015.
Policymakers said their outlook on inflation was unchanged
versus a March decision.
Cooling inflation after a spike in January from new taxes
has given the bank room to support weak growth, which sank to a
four-year low of 1.1 percent last year.
Minutes from the central bank's last meeting in March showed
most policymakers think they need to cut their economic growth
forecast for this year of 3 percent to 4 percent. Analysts have
cut their estimates to around 3 percent this year.
The central bank said it saw "incipient signs" of stronger
consumption and investment. Data on Friday showed Mexico's
economy expanded in February at the fastest pace in seven months
on a rebound in the service sector.
But several analysts said they were surprised by the bank's
view that growth was improving, after data this week showed
February retail sales fell for a third month in a row,
underscoring faltering domestic demand.
"We just don't see any improvement - not even incipient - in
domestic consumption and investment just yet," Nomura analyst
Benito Berber wrote in a note.
Mexico's central bank cut its benchmark interest rate three
times last year. If growth remains weak, the central bank has
little room to further lower borrowing costs since the U.S.
Federal Reserve has begun to unwind its monetary stimulus.
Foreign investors have amassed a record 1.9 trillion pesos
($145 billion) of local currency debt and any move to lower
Mexican interest rates as U.S. yields rise could undermine the
appeal of local assets and weaken the peso currency. A weaker
peso could fan inflation by driving up import prices.
Mexico's central bank noted in its statement that flows to
emerging markets had resumed in recent weeks as worries about
the impact of tighter U.S. policy on global markets eased.
Still, analysts point out that renewed global concerns could
hit Mexico hard, due to the liquidity of its bonds and currency.
(Reporting by Michael O'Boyle and Alexandra Alper; Editing by W
Simon and Chizu Nomiyama)