• Central bank sees bigger growth risks while inflation falls
  • Board members will continue to monitor Fed effect on Mexico

Mexican policy makers were unanimous in their decision to keep the key interest rate unchanged last month, with a majority saying that weak growth and inflation argue for leaving rates at a record low as long as U.S. borrowing costs don’t rise.

Banco de Mexico’s board, led by Governor Agustin Carstens, maintained the overnight rate at 3 percent on Oct. 29, as forecast by all 28 economists surveyed by Bloomberg. Latin
America’s second-biggest economy remains sluggish and prices don’t face demand pressures, most board members said, according to minutes of the meeting published Thursday.

After a surprise half-point cut more than a year ago, Mexico’s central bank has held rates steady to boost a $1.28 trillion economy that is being slowed by a drop in oil output and weak industrial production. While growth is tepid and inflation has slowed to less than the 3 percent target, policy makers have been concerned an increase in U.S. interest rates could spur foreign investors to withdraw capital.

“Economic conditions are still showing weakness,” policy makers said in the minutes. “However, possible monetary policy actions by the Federal Reserve could have
repercussions on the exchange rate, inflation expectations and, thus, on price dynamics in Mexico.”

While one board member said Mexico may need to raise interest rates before the Federal Reserve if volatility increases in financial markets, others said such a move wouldn’t be advisable. Another member said the Mexican central bank should wait for the Fed to raise U.S. borrowing costs to assess the effect on Mexico.

“We have started to see some different opinions among board members,” Marco Oviedo, chief Mexico economist at Barclays Plc, said in an e-mailed response to questions. “They are still waiting for the Fed but some might not want to hike immediately after.”

The peso weakened 0.1 percent to 16.7417 per U.S. dollar at 9:57 a.m. in Mexico City.

Mexico’s economy is showing mild growth amid slowing external demand, depressed oil prices, a reduction in crude output and low investment growth, the central bank said in a statement accompanying its Oct. 29 rate decision.

Economic growth is likely to amount to 2.3 percent this year, according to a survey of analysts released by the central bank Nov. 3. That’s more than a percentage point less than the forecast at the end of last year.

While growth projections have slowed, the central bank has signaled that higher borrowing costs in the U.S. may call for an increase in Mexico, even as inflation is below policy makers’ target. The inflationary impact of the peso’s 19 percent decline the past year remains small, policy makers said.

Prices rose 2.48 percent in October from a year earlier, the lowest annual inflation rate since 1968. The majority of policy makers reiterated their expectation for price increases to remain below 3 percent this year and near that level in 2016.

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