GO
Loading...

UPDATE 2-Mexico central bank unanimous in holding rates; risk to growth noted -minutes

Alexandra Alper and David Alire Garcia
Friday, 20 Dec 2013 | 1:28 PM ET

-minutes@

MEXICO CITY, Dec 20 (Reuters) - Mexico's central bank flagged risks to growth but was hopeful economic reforms could lift the economy in the months ahead, with minutes of its latest meeting showing its board was unanimous in holding interest rates at a record low.

Central bank board members voted 5-0 at their Dec. 6 meeting to keep the benchmark rate at 3.50 percent after cuts in October and September that were aimed at countering a sharp slowdown in Latin America's No. 2 economy.

Events have moved quickly since that meeting.

Last week, Mexico's Congress passed a radical shake-up of its energy market, which boosted hopes for the economy and prompted Standard & Poor's to lift the country's sovereign long-term foreign currency credit rating.

The minutes showed that even though the economy rebounded in the third quarter, a majority of the bank's board members said that hazards remain, noting that growth in the United States, Mexico's top trading partner, could disappoint.

"While the majority of members indicated that downside risks to growth prevail, they also noted that there are upside risks over the medium term largely due to the potential impact of structural reforms," the minutes said.

Before shepherding through his signature reform, the energy bill, President Enrique Pena Nieto had already signed off on laws to overhaul education, boost competition in telecommunications, spur lending, and increase a weak tax take.

A majority of policymakers said the energy reform, which aims to raise Mexican growth that has long lagged emerging market peers, could help boost productivity and investment.

Mexico's economy, which is expected to grow just 1.3 percent this year, contracted in the second quarter on weak government spending and a sagging construction sector.

The central bank stuck to its forecasts that the economy will expand between 3 percent and 4 percent next year.

Since the central bank's decision, there has been optimism in the markets that the U.S. economy is on the mend.

Data on Friday showed the U.S. economy grew at its fastest pace in almost two years in the third quarter. 1/2ID:nL2N0JZ0OJ 3/8

Markets were also buoyed on Wednesday after the Federal Reserve said it would begin to reduce the pace of its monthly stimulus program, put in place to shore up the U.S. economy.

TAME INFLATION, DEPRECIATION RISK

Following the release of the minutes, Barclays said it did not expect Banxico to start hiking rates until the first quarter of 2015. Other economists said it could be even later.

Most Mexican central bankers said risks to inflation were unchanged from the last meeting, citing no visible demand-side pressures, even as inflation rose to 3.62 percent last month on a jump in fresh food prices and a seasonal spike in power costs.

The board projected inflation would hover around 3.5 percent through next year before dipping to 3 percent in 2015.

The policymakers reaffirmed their view that Pena Nieto's fiscal reform will boost prices in the short-term, but continue to forecast the effect will be transitory.

Inflation spurred by the tax changes in early 2014 "will foster a more hawkish tone from board members, but it won't be enough for rate hikes," said Gabriel Casillas, an economist for Banorte in Mexico City.

But some risks remain.

Following the start of the withdrawal of U.S. monetary stimulus, higher U.S. interest rates could draw back a tide of investment that flooded into emerging markets since 2009.

A majority of the central bank board also flagged a risk of exchange rate depreciation due to financial market volatility.