May 17, 2018 / 7:18 PM / a year ago

UPDATE 1-Mexico central bank holds rates steady, flags peso uncertainty

(Recasts with announcement, central bank comments)

MEXICO CITY, May 17 (Reuters) - Mexico’s central bank held its benchmark interest rate steady on Thursday, and policymakers warned that uncertainty surrounding trade talks with the United States and Canada as well as domestic elections could negatively affect the peso.

The Banco de Mexico’s governing board unanimously voted to keep the key rate steady at 7.50 percent, unchanged for a second meeting in a row after a string of increases, as forecast by 21 of 25 analysts polled by Reuters.

The bank’s policymakers said the current rate should help inflation fall back to their 3 percent target and that they were closely following potential inflation pressures from a weaker peso, adding they could hike in a timely manner, if needed.

“In the presence of a highly uncertain environment, the balance of risks for inflation in relation to its expected path remains biased upwards,” the central bank said in its statement.

Data this month showed annual inflation rate in April cooled to 4.55 percent, the lowest since late 2016.

The peso, meanwhile, has tumbled close to 5 percent this month to its weakest in more than a year, hit by a broadly stronger dollar. The central bank said “domestic factors” also weakened the currency.

Policymakers said the peso could be further hurt by “uncertainty” about Mexico’s presidential election on July 1, as well the renegotiation of the North American Free Trade Agreement (NAFTA).

Policymakers suggested they could act to defend the peso, if needed. “In the event of a scenario in which the real exchange rate would need to adjust, Banco de Mexico will make sure it is done in an orderly manner,” the bank said. (Reporting by Michael O’Boyle and Gabriel Stargardter; Editing by Steve Orlofsky)

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