(Adds comment from central bank governor Carstens)
By Michael O‘Boyle and Alexandra Alper
MEXICO CITY, Dec 5 (Reuters) - Mexico’s central bank on Friday held borrowing costs steady but said a slump in the peso could add to inflation pressures, and noted that growing social unrest in Latin America’s No. 2 economy may crimp growth.
The central bank left its main interest rate at a record low of 3.00 percent, as expected by 19 of 20 analysts polled by Reuters last week. IDL:nL6N0TI4BK]
Mexico’s peso slumped to a fresh 2-1/2 year low against the dollar on Friday. The Mexican currency has been hammered as global oil prices have dropped, driving prices for Mexico’s crude MXN-OSP to a five-year low.
Policymakers said that in recent years bouts of weakness in the peso had little impact on consumer prices, but they noted that “the sustained depreciation of the national currency could represent an upside risk to inflation.”
The peso exchange rate needed to be monitored “with a lot of caution,” central bank governor Agustin Carstens said on the sidelines of an event in Santiago, Chile.
However, countering risks from the currency, policymakers said slack in the local economy and slow inflation around the globe would help contain price pressures.
Mexico’s annual inflation rate eased in early November to 4.16 percent but it is still above the central bank’s 4 percent tolerance ceiling. Policymakers said the rate should fall to around 3 percent by the middle of next year.
The bank also flagged increasing risks to growth due to slowing economies around the world and unrest in Mexico.
The government has faced mass protests over the apparent massacre of 43 students in September in southwestern Mexico.
Mexico’s economy grew just 0.5 percent quarter-on-quarter in the July-September period, but signs of stronger U.S. growth are expected to lift demand for manufacturing exports.
Mexico’s central bank has held borrowing costs steady since cutting them in June to aid a weak economy. Markets are betting the bank will raise interest rates around the middle of next year, in tandem with the U.S. Federal Reserve.
Stronger-than-anticipated U.S. payrolls data on Friday heightened expectations a rate hike from the Federal Reserve may come sooner than previously thought.
The peso has weakened amid concerns that higher U.S. rates will push investors to dump emerging market assets. (Reporting by Michael O‘Boyle and Alexandra Alper; Additional reporting by Anthony Esposito in Santiago; Editing by Meredith Mazzilli and Simon Gardner)