August 2, 2018 / 7:27 PM / 3 months ago

UPDATE 2-Mexico's central bank holds rates steady, trims growth outlook

(Adds quote from central bank governor)

MEXICO CITY, Aug 2 (Reuters) - Mexico’s central bank held its main interest rate steady on Thursday and trimmed its outlook for economic growth this year, as it vowed to maintain a “prudent” policy stance due to risks to inflation.

In its first policy decision since national elections last month, the Bank of Mexico board voted unanimously to leave its benchmark rate unchanged at a more than nine-year high of 7.75 percent, as expected in a Reuters poll.

The bank said risks to growth were tilted downward and that the economy would likely expand between 2 percent to 2.5 percent this year, compared to previous guidance of 2 percent to 3 percent.

“A few months ago, we thought that the growth would be greater,” Central Bank Governor Alejandro Diaz de Leon said on local radio on Thursday evening, adding that “the economic activity is starting to show a weakness that was not anticipated.”

The policymakers said in their statement that risks to inflation were still tilted upward “in an environment of high uncertainty.”

“The Governing Board will maintain a prudent monetary policy stance,” the central bank said in a statement, noting it would closely follow potential pass-through to inflation from the peso, as well as Mexico’s monetary policy stance relative to the United States and slack in the domestic economy.

Mexico’s central bank hiked rates in June after the U.S. Federal Reserve raised borrowing costs and following a slump in the peso, which fanned concerns inflation could take longer than expected to cool back toward policymakers’ 3 percent target.

The peso was hit by a broad dollar rally and worries about the success of talks to renegotiate the NAFTA trade deal between Mexico, the United States and Canada.

But the currency has rallied back around 12 percent since mid-June, helped in part by market-friendly comments from leftist Andres Manuel Lopez Obrador and members of his team just before his landslide victory in the July 1 presidential election.

The United States and Mexico resumed NAFTA talks last week, which has also helped the peso, but Mexican policymakers said there were risks the currency could be hit again by uncertainty around their outcome.

Recent data has shown the annual inflation rate picked up in early July to 4.85 percent, while Mexico’s economy shrank slightly in the second quarter.

The central bank said the chance for demand-side inflation pressure was low, however.

Also supporting Mexico’s steady stance, for now, was the decision by the Federal Reserve to keep interest rates unchanged on Wednesday. (Reporting by Michael O’Boyle; additional reporting by Lizbeth Diaz Editing by Tom Brown)

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