January 30, 2015 / 5:06 AM / in 3 years

UPDATE 3-Mexico cenbank holds steady with eye on peso, weak growth

* Rate change ‘not necessary’ at moment - cenbank gov

* Key rate held at 3.0 pct, as poll expected

* Governor says spending cuts might be advisable (Adds central bank governor’s comments)

MEXICO CITY, Jan 29 (Reuters) - Mexico’s central bank on Thursday held interest rates at a record low as policymakers eyed the risk that a sharply weaker peso could fan consumer prices higher while also noting big risks to growth.

The bank kept its main interest rate at 3.00 percent, as expected by 19 of 20 analysts polled by Reuters.

Interest rate moves are not needed right now, Mexican Central Bank Governor Agustin Carstens said after the decision.

“It is really not necessary to adjust interest rates at the moment,” Carstens said, speaking at an event in Los Cabos, Mexico, according to a transcript released by lawmakers.

Carstens said earlier this month that Mexico will probably have to raise interest rates this year, given the Federal Reserve’s expected hike in U.S. borrowing costs.

Many analysts expect the Fed’s move to spur a reversal in a tide of investment that has flooded into emerging markets in recent years.

Tumbling oil prices have slammed Mexico’s peso , which slumped nearly 12 percent in the fourth quarter, and fueled speculation that officials are planning to announce spending cuts soon.

Carstens said spending cuts might be advisable.

“If the adjustment (in spending) is not made and financial stability in the country deteriorates, that would lead to higher interest rates, more exchange rate volatility, possibly higher inflation, and I think it still would have a worse impact on economic growth.”

Policymakers in Mexico said they would watch the impact of the deep peso slump on inflation and said the currency could stay at current levels - close to an almost six year low - for a “prolonged period”.

Annual inflation slowed sharply in early January to just above 3 percent after running above the central bank’s 4 percent ceiling.


Balancing their concerns about inflation and the peso, central bank board members said there were “big risks” facing the economy. Mexico’s economy is expected to have grown just above 2 percent last year.

Policymakers said private consumption had yet to show signs of a clear recovery, noting that a jump in public spending had produced only a “limited” impact on growth.

They said the peso’s recent losses reflected concerns about the impact of lower oil prices on Mexico’s fiscal position and current account.

Given the risks of a sharper peso depreciation, policymakers said it would be important to strengthen the country’s macroeconomic position “especially in the fiscal area,” where appropriate.

The price for Mexico’s mix of crude MEX-OSP has fallen to just above $40 per barrel compared to a estimates of $79 per barrel used to plan the 2015 budget.

While the finance ministry has said it had bought derivatives to hedge enough of its oil exports to maintain planned spending, local media has reported that officials are planning to announce spending cuts soon. (Reporting by Michael O’Boyle, Gabriel Stargardter and Alexandra Alper; Editing by Chizu Nomiyama and Richard Borsuk)

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