IMF cuts Mexico growth outlook amid trade worries

Mexico is facing risks to its growth from trade protectionism, the International Monetary Fund said on Tuesday, as it cut its growth forecast for the coming years for Latin America's No. 2 economy.

The IMF revised its forecast for Mexican gross domestic product growth for 2016 to 2.1 percent from a 2.5 percent rate seen in July, according to its annual Article IV report on the country. It cut its 2017 growth forecast to 2.2 percent from 2.6 percent.

The IMF also said it was revising down its medium-term forecasts for the following years by about half a percentage point due to lower oil production and a weaker U.S. outlook.

U.S. President-elect Donald Trump has threatened to tear up the NAFTA trade deal and impose tariffs on Mexican-made goods.

The IMF suggested a weaker peso would "be indispensable to restore equilibrium in response to a permanent shock arising from increased protectionism and rising barriers to trade."

Mexico's central bank has raised its benchmark interest rate four times this year as the peso slumped on concerns currency weakness could drive up inflation.

But the IMF said there was no sign of widespread consumer price pressures from the weaker peso and recommended the central bank slow the pace of rate hikes.

"A pause in monetary policy tightening appears warranted in the near term, given the moderation in economic activity, absence of second-round effects from the depreciation, and limited wage pressures," the report said, noting that further moves by the central bank should be "data driven."

Bank stress tests showed Mexican banks were resilient to severe shocks given high levels of capital, the IMF said in a special report on the banking system.

It recommended improvements in banking supervising agencies and noted authorities had no plan for a systemic banking crisis.