Slow Mexico growth eases inflation pressure

MEXICO CITY: Mexico's central bank showed it was in no rush to increase the cost of borrowing as it held interest rates steady for the 24th month running and said growth was slowing and inflation was under control.

The bank on Friday said that it held its target rate for overnight lending between banks at 4.5 percent, a stance it has maintained since July 2009.

"The pace of economic activity appears to have slowed," the central bank said in a statement, noting that "annualized inflation has maintained a favorable direction."

The decision at the bank's monthly monetary policy review was unanimously expected by 18 economists polled by Reuters.

Low inflation, high unemployment and an uncertain growth outlook are likely to keep policymakers holding the benchmark rate steady for some time.

"Inflation is really under control at the moment so there's no chance of a move on interest rates anytime soon," said Eugenio Aleman of Wells Fargo Securities in Charlotte, North Carolina, insisting that rates would be on hold this year.

Yields in Mexico's market for interest rate swaps suggest investors are betting the central bank will wait until next April to hike rates Just a few weeks ago, those bets were concentrated around a March hike.

Mexico's economic fate is mostly determined by whether US consumer demand will fire up local factories and stoke exports to the United States which make up about 80 percent its total export earnings.

Disappointing news on Friday about swollen US jobless rolls and a reluctance to spend among Mexicans are among factors being watched by Mexican policymakers, analysts said.

"This statement is more dovish than what we have seen due to external factors but also local issues like weak domestic demand," said Rafael de la Fuente, economist with UBS in Stamford, Connecticut.

Mexico's policymakers have a long-term target of 3 percent inflation and consumer prices only rose 3.28 percent in the year through June - little changed from May.

Meanwhile, analysts are paring back their expectations for growth. A June survey pointed to a 4.31 percent expansion this year - down from the 4.37 percent expected a month earlier.

Mexico has been the laggard of Latin America in rebounding from recession but the second-largest economy in Latin America has been spared punishing inflation, also.

Brazil, Chile and Peru have all hiked rates to cool their faster-growing economies.

Copyright Reuters, 2010