UPDATE 2-Mexico central bank raises interest rates to 4.5% in 'dovish' hike

(Add comments from central bank, economist)

MEXICO CITY, Aug 12 (Reuters) - The Bank of Mexico on Thursday raised its key interest rate by 25 basis points to 4.5% in a bid to contain price pressures, and more increases are expected this year even though two of its five-member board voted to leave borrowing costs unchanged.

The three-to-two vote in favor of a rate hike, the second in succession by the bank, was in line with the consensus forecast of a Reuters poll of analysts earlier this month.

In its latest monetary policy statement, the bank, known as Banxico, said the balance of risks for inflation within its forecast horizon was biased to the upside.

“Although the shocks that have increased inflation are expected to be transitory, due to their variety, magnitude, and the extended horizon over which they have affected it, they may pose risks to the price formation process,” the bank said.

Mexican annual inflation slowed to the lowest level in four months in July at 5.81%, but it exceeded forecasts and stayed well above the central bank’s stated objective.

The bank targets inflation of 3%, with a one percentage-point tolerance range above and below that.

“It was deemed necessary to strengthen the monetary policy stance in order to avoid adverse effects on inflation expectations and enable an orderly adjustment of relative prices and the convergence of inflation to the 3% target,” it said.

In a change in its communication strategy here, Banxico provided updated inflation forecasts. For the end of 2021, it forecast headline annual inflation of 5.7%, up from a prior projection of 4.8%, and core annual inflation of 5.0%, up from 3.9% previously.

Projections for headline and core inflation are expected to decrease as next year progresses, and to converge to the 3% target during the first quarter of 2023, Banxico said.

Banxico Governor Alejandro Diaz de Leon and board members Irene Espinosa and Jonathan Heath voted in favor of the rate increase, while members Galia Borja and Gerardo Esquivel were in favor of keeping the interest rate unchanged at 4.25%.

Nikhil Sanghani, an economist at Capital Economics, called the 3-2 split in favor of raising rates a “dovish” hike.

He argued that it suggested that “the tightening cycle will continue to progress gradually from here, even as inflation stays well above target over the coming months.”

Sanghani forecast 25 basis point rate hikes at each of the bank’s next four monetary policy meetings, taking the key rate to 5.50% by the first quarter of 2022. (Reporting by Dave Graham and Anthony Esposito; Editing by Steve Orlofsky and Nick Zieminski)