MEXICO CITY: The Bank of Mexico's shift toward suggesting a possible hike in interest rates was driven by a minority on the central bank board, with the majority leaning toward steady rates as they eye deepening risks to growth.
Policymakers were unanimous in their Sept. 7 decision to keep rates on hold at 4.5 percent, but there is a growing divide among board members on the risks from a spike in inflation and the need to raise interest rates, minutes of the September rate meeting showed on Friday.
After its last decision, the bank signaled it could tighten monetary policy in the future after inflation jumped to its highest in almost 2-1/2 years in August, driven by rising food costs.
But the minutes suggested only two members of the five-member board see growing reasons for a possible interest rate hike, while the rest think inflationary pressures are a temporary bubble that does not justify higher borrowing costs.
"The majority of members agreed that the downside risks to inflation in the medium term persist," the minutes said.
"The majority of members agreed that the board would only act if the observed inflation pressures could be contained by monetary policy."
This contrasted with the minutes' description of "some" members who were leaning towards a hike.
Analysts said the majority's view suggested they would not hike unless demand-side pressures, such as wage increases, became a problem or in the case that mid-term inflation expectations deteriorate.
Despite the tougher language on inflation in the last statement, investors and economists are unconvinced that the bank is seriously considering a rate increase.
Yields on Mexican short-term interest rate swaps were little changed after the minutes as investors stuck to bets that rates will remain on hold into 2014.
"The minutes for the September 7 meeting are more neutral than the slightly hawkish communique," analysts at Nomura noted. "We are now more convinced than ever that Banxico will not move (either hike or cut) the policy rate in a long time."
Mexico's steady stance contrasts with Brazil, where rates have been cut to record lows to counter an economic slowdown, and the United States, where the Federal Reserve last week said it would offer more stimulus.
Analysts noted that easier money in major economies was effectively tightening monetary conditions in Mexico and feeding gains in the peso that should help cool inflation by making imports cheaper.
The peso has recovered more than 13 percent from a three-year low hit in June, and the recent stimulus from the Fed, as well as the European Central Bank, is expected to support riskier assets, such as the peso, going forward.
Still, the majority of policymakers at Mexico's central bank said that they could not rule out that renewed global market volatility could hit the peso again.
Mexico's annual inflation rate is seen rising to a 2-1/2-year high of 4.82 percent in early September, according to a Reuters poll.
Inflation has already overshot the central bank's 4 percent limit for three straight months after bad weather and an avian flu outbreak drove up egg, corn tortilla, meat and bean prices.
But most policymakers thought such pressures would be transitory and most also thought risks to growth had worsened since the previous policy meeting due to global economic woes.
So far, the spike in inflation has not hit mid-term expectations. Analysts' estimates for annual inflation at the end of 2013 held steady at 3.70 percent in the latest bi-weekly poll from Banamex released this week.
A separate report on Friday showed Mexico's jobless rate rose in August, breaking a five-month streak of declines and adding to expectations of a deceleration in Latin America's second-largest economy in the second half of 2012.
But economists said this was good news in the sense that labor market slack would not put any extra pressure on inflation.
"The board perceives that the Mexican economy deceleration is milder than expected ... but no inflationary pressures are perceived," said Barclays analyst Marco Oviedo in a note.
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