Mexico central bank holds rate steady, but eyes risks from peso

Mexican growth slowed in the fourth quarter due to flat industrial activity.

English 04/02/2016 17:16 Reuters Actualizada 17:16

Mexico's central bank held borrowing costs steady on Thursday, but said it would monitor increasing risks to inflation from a slump in the peso, suggesting it could hike interest rates if there is further weakness in the currency.

The Banco de Mexico left its key rate at 3.25 percent, as expected by all 15 analysts surveyed by Reuters last week.

The central bank said in a statement that risks to inflation had increased, and added that it would closely monitor the exchange rate and the risk that currency weakness could fan consumer price pressures.

Mexican policymakers also suggested they would monitor the moves of the U.S. Federal Reserve without "neglecting" the slack in the economy.

The central bank's statement brought the peso to the front of its list of key elements that could determine its next policy move.

"(This) can be seen as an official warning from the central bank that it may increase the overnight rate in the foreseeable future if the peso continues to weaken against the U.S. dollar, even if the U.S. Fed is on hold," Credit Suisse economist Alonso Cervera wrote in a note to clients.

The Banco de Mexico hiked its key rate in December for the first time in seven years from a record low of 3 percent, hoping to support the peso after a rate increase by the Fed threatened to sap demand for emerging market assets.

Thursday's decision by the Mexican central bank came after the Federal Reserve kept borrowing costs unchanged last week.

Even after December's rate hike, Mexico's currency hit a series of record lows against the dollar. However, the currency's slump has yet to have a big impact on inflation, which is near its lowest level on record.

The annual inflation rate rose in early January, but remains well below the central bank's 3 percent target. The central bank said on Thursday that inflation would be around 3 percent in 2016.

Last month, the peso sank to an all-time low of 18.80 per dollar, hurt by worries about a global slowdown and a tumble in oil prices, but the currency has bounced back somewhat.

Still, the central bank said it could not rule out renewed, or even greater, volatility in global financial markets.

The central bank also noted that the outlook for growth had worsened a bit since its last meeting. Mexican growth slowed in the fourth quarter due to flat industrial activity, preliminary data showed last week.