Mexico central bank flags risk of Fed move on peso, weak growth

By Reuters

Mar 26, 2015 05:43 PM EDT

Mexico's central bank held interest rates MXCBIR=ECI steady on Thursday at a record low as policymakers eyed greater risks to growth and flagged concerns that a U.S. Federal Reserve move could hit the sinking peso.

The bank left its main interest rate at 3.00 percent as expected by a Reuters poll, promising to closely watch the actions of the Fed, which is expected to raise rates for the first time since 2006 as soon as September.

United States "monetary policy action could have repercussions on the exchange rate, inflation expectations and, therefore, price dynamics in Mexico," the central bank said in uncharacteristically explicit terms.

Mexico's peso this month weakened to historic lows against the dollar, hammered by a slump in oil prices and fears that an imminent U.S. rate hike may spur capital flight from emerging markets.

Policymakers said they could not rule out further international volatility that could affect the peso, which Central Bank governor Agustin Carstens described as "undervalued" last week.

Banxico also flagged less dynamism in Mexico's export sector, thanks to slower growth in U.S. manufacturing. Mexico sends nearly 80 percent of its exports, which are mostly factory goods, to the United States.

Low oil production and weak consumption also hamper Mexican growth, the central bank said.

"If you read the whole thing, it's like these guys are never going to hike," said Benito Berber an analyst at Nomura Securities in New York, who described the statement as "dovish".

If the Fed raises interest rates in September, Berber expects Banxico to begin hiking the same month or in October.

Latin America's No. 2 economy, which was hurt by weak local demand last year, grew 2.1 percent for all of 2014, up from 1.4 percent in 2013. Analysts polled by the central bank expect growth of just over 3 percent this year.

The board said inflation, which slowed to the central bank's 3 percent target last month for the first time in nearly nine years, should end the year below the target.

Consumer prices have not been hit by second round shocks from the weak peso, the board said, but indicated that the weak currency could fan inflation.

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