August 16, 2018 / 3:44 PM / 3 months ago

UPDATE 1-Mexico central bank flags upside inflation risks in minutes

(Adds background, details)

MEXICO CITY, Aug 16 (Reuters) - Mexico’s central bank flagged ongoing risks to the inflation outlook due to uncertainty over the NAFTA trade deal, pressure on the peso and the strength of the U.S. dollar, minutes from its latest monetary policy meeting showed on Thursday.

The Bank of Mexico’s board members voted unanimously to hold the benchmark rate unchanged at a more than nine-year high of 7.75 percent on Aug. 2.

Still, pressures on the peso currency due to higher external interest rates, dollar strength, and a potential escalation in commercial disputes stemming from U.S. trade policy all posed risks to the inflation outlook, the minutes showed.

“Most members agreed that the balance of risks for the expected trajectory of inflation continues biased to the upside, in an environment of high uncertainty,” the minutes stated.

U.S. President Donald Trump has pushed a renegotiation of the North American Free Trade Agreement (NAFTA) which underpins much of Mexico’s foreign trade. Trump argues that NAFTA has hurt U.S. industry and cost manufacturing jobs.

NAFTA talks have been underway for a year, and while progress has been made, doubts over the outcome persist.

Some members of the bank’s board noted there had been “recent signs of a positive outcome” to the NAFTA talks despite ongoing uncertainty. One member was of the view that the risk of a negative result had decreased, the minutes showed.

Most members of the bank’s board thought the balance of risks to growth were tilted downward and that Latin America’s No. 2 economy would likely grow in the lower half of previous guidance for an expansion of between 2 percent and 3 percent in 2018.

Before the Aug. 2 rate decision, Mexico’s peso had rallied for several weeks, helped in part by market-friendly comments from leftist Andres Manuel Lopez Obrador and his team just before his landslide victory in a July 1 presidential election.

Since then, the currency has been hit by the recent global emerging markets sell-off prompted by a tumble in Turkey’s lira. (Reporting by Mexico City Newsroom Editing by Tom Brown)

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