Mexico central bank holds steady with eye on peso, weak growth

MEXICO CITY: 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. Policymakers said they would carefully watch the impact of a 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.

However, Mexico's peso tumbled nearly 12 percent in the fourth quarter. While it has recovered slightly, the sharp drop could push vendors to raise prices this year. 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. Mexican central bank governor Agustin Carstens said earlier this month that Mexico will probably have to raise interest rates this year, given the Federal Reserve's own expected hike in US borrowing costs.

In their statement on Thursday, policymakers said the peso's recent losses reflected concerns about the impact of lower oil prices on Mexico's fiscal position and current account.

The central bank said it could not rule out further peso losses due to expectations about the Fed's move, which analysts think could spur a reversal of a tide of investment that has flooded into emerging markets in recent years.

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 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.