MEXICO CITY: Mexico's central bank kept interest rates unchanged on Friday as it brushed off a recent pick-up in inflation and kept the door ajar for a possible further relaxation in credit costs if stimulus in advanced economies fans capital inflows.
All 21 analysts polled by Reuters had forecast the Banco de Mexico would keep rates at a record low 4 percent this month after it cut benchmark credit costs for the first time in nearly four years in March.
Markets are pricing in a good chance of another 25 basis point cut in the second half of the year, when inflation is forecast to decline and a expected pick-up in the United States should boost growth prospects in Mexico.
Policymakers said a spike in consumer prices that has taken inflation above the central bank's ceiling in March and early April was transitory and said they saw no broad price pressures.
"Going forward, the board will continue monitoring all factors that could affect inflation," the central bank said in a statement accompanying the decision.
"In particular, we will remain alert to ensure recent changes in relative prices do not create second-round effects on the process of price formation and the evolution of Mexico's monetary policy position relative to other countries."
Chief among the central bank's concerns is the rising peso , up almost 6 percent so far this year on the back of strong capital inflows, fanning worries about softening growth.
"The growing flow of capital towards the country has led to a considerable appreciation in the peso and reductions in market interest rates," the statement said.
Mexico has absorbed $160 billion in new foreign investment in its financial markets in the last three years, pushing stocks and bonds to record highs. Analysts say stimulus by the Bank of Japan could spur fresh inflows.
The stronger currency does help keep a lid on inflation by capping the price of imported goods.
Annual inflation accelerated to a seven-month high of 4.72 percent in early April, although the central bank said it should start to cool in June and be between 3 percent and 4 percent in the second half of the year.
Banco de Mexico targets inflation of 3 percent, with a one percentage point tolerance zone either side.
"If we confirm that inflation resume a downward trend in a couple of months and the (peso) continues to strengthen, we could well see further cuts by Banxico this year, especially considering how hesitant they are to intervene in the FX market," Standard Chartered economist Italo Lombardi said.
Mexico's strong currency contrasts with recent weak economic data suggesting economic growth slowed in the first quarter of 2013, after picking up at the end of 2012.
Retail sales fell in February by the most in 3-1/2 years and industrial output growth slowed. The trend continued in March, with the jobless rate rising and consumer confidence and factory activity deteriorating for the third month running.
But exports are holding up: separate data on Friday showed factory exports rose in March for the second month in a row, up 3.18 percent last month from February when adjusted for seasonal swings, bolstered by a strong rise in auto exports.
Total exports rose 1.58 percent in the month, with oil exports falling 9.01 percent and imports rose 1.23 percent. Imports of non-oil consumer goods picked up but imports of intermediate goods and capital goods, which are signals of future output, both fell.
Mexico posted a $456 million trade deficit in March when adjusted for seasonal swings, the statistics office said.
In non-seasonally adjusted terms, Mexico posted a trade surplus of $1.714 billion.
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