Mexico's central bank seen holding steady while peso slumps

MEXICO CITY: Mexico's central bank is expected to hold its benchmark interest rate at a record low on Friday as policymakers eye a slump in the peso that could add to inflation pressures.

Nineteen of 20 analysts surveyed by Reuters last week expect the central bank to keep its main interest rate at 3.00 percent while one analyst forecast a 25 basis point cut after weaker-than-expected third quarter growth.

Still, analysts at Capital Economics on Thursday switched their call to predict a rate cut, arguing a recent slump in oil prices will crimp growth and could push the central bank to use lower borrowing costs to support Latin America's No. 2 economy.

Other economists rejected the possibility and pointed to the risk that a surprise interest rate cut could spur a run on the peso. A drop in oil prices has already driven the cost of dollars in pesos to a 2-1/2 year high above 14 per dollar.

"With the exchange rate where it is, I do not see Banxico cutting. The peso could go to 15," said Deutsche Bank analyst Alexis Milo.

The central bank will issue its policy statement at 9:00 local time (1500 GMT).

Mexico's annual inflation rate eased in early November to 4.16 percent, cooling after a spike above the central bank's 4 percent tolerance ceiling. Policymakers said last month they expect the rate to slow to near 3 percent by mid-2015.

But a much weaker peso could fan inflation by driving up import prices.

Mexico's central bank has held borrowing costs steady since catching markets off guard with a 50 basis points cut in June to aid a weak economy. Markets are betting the bank will raise interest rates around the middle of next year.

Mexico's economy grew just 0.5 percent quarter-on-quarter in the July-September period, but signs of stronger US growth are expected to lift demand for the country's manufacturing exports.

However, concerns about a glut in the world oil supply have driven prices for Mexico's crude mix to a five-year low.

Analysts said the drop could dampen interest in the opening of Mexico's oil industry and noted the peso has wilted amid concerns of less robust investment in oil projects next year.