August 25, 2016 / 3:17 PM / 2 years ago

UPDATE 1-Mexico central bank concerned about growth, U.S. election-minutes

(Adds details, background)

By Gabriel Stargardter and Alexandra Alper

MEXICO CITY, Aug 25 (Reuters) - Mexican policymakers were unanimous in their decision to hold interest rates steady earlier this month, the central bank said on Thursday, while a majority of board members flagged worsening risks to growth.

Policymakers voted 5 to 0 to maintain the bank’s key rate at 4.25 percent in an Aug. 11 decision in which they warned that uncertainty around the U.S. presidential election might cause deeper peso losses that could fan inflation.

The minutes from the meeting showed that a majority of board members remained concerned about the upcoming U.S. election and any effects on peso volatility. They also flagged possible monetary policy changes by the Federal Reserve Bank and the oil price as factors that could affect the peso.

A majority of members said the peso, which has weakened more than 7 percent this year, but is up nearly 2 percent in August, had been very volatile since the last board meeting.

However, a majority said that for the time being, there has been no evidence of any impact on inflation from peso weakness.

The balance of risks to growth has deteriorated since the last meeting, a majority of board members said, citing concerns over a slow manufacturing recovery in the United States and weaker economic confidence in Mexico, as well as lower oil production in Mexico.

On Monday, data showed Mexico’s economy shrank in the second quarter for the first time in three years, prompting the government to revise down its 2016 growth outlook to a range of 2.0 percent to 2.6 percent from 2.2 percent to 3.2 percent.

The contraction comes as a slump in crude oil prices hammers Mexico’s economy and after the central bank aggressively increased its benchmark rate in June following a sharp depreciation of the peso.

Standard & Poor’s on Tuesday lowered Mexico’s sovereign credit outlook to negative from stable, adding that a downgrade could happen in the next two years if the government’s debt or interest burden deteriorated.

A majority of board members expected inflation to gradually rise, and close the year slightly above the bank’s 3 percent target. In the short and medium-term, the inflation scenario remained congruent with the bank’s target, a majority of policymakers said.

As a result of the June rate hike, a majority of board members thought the balance of risks to inflation were neutral. (Reporting by Gabriel Stargardter and Alexandra Alper; Editing by Simon Gardner and Phil Berlowitz)

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