October 4, 2018 / 7:20 PM / 19 days ago

UPDATE 2-Mexico central bank holds interest rates steady in divided vote

(Adds comments from central bank governor)

MEXICO CITY, Oct 4 (Reuters) - Mexico’s central bank held interest rates steady on Thursday, with one member calling for a 25-basis points hike and the board cautioning it may need to raise rates again due to the threat of persistently high inflation.

A majority of the Bank of Mexico’s five-member board voted to keep the benchmark interest rate steady at 7.75 percent, a 9-1/2 year high, as expected by 18 of 26 analysts polled by Reuters this week. One board member voted for a hike to 8.0 percent.

Banco de Mexico said in its post-meeting statement that the balance of risks to the forecasted trajectory of inflation remains biased upwards and that it would maintain a prudent policy stance.

“The central bank will take the necessary actions, specifically, maintaining or possibly strengthening the current monetary policy stance so that headline inflation converges” to the central bank’s 3 percent target rate, the bank said.

The successful conclusion of talks to update key a free trade deal with the United States and Canada made the peso more resilient than other emerging market currencies in the face of concerns about global trade disputes and rising U.S. interest rates, the bank noted.

Central Bank Governor Alejandro Diaz de Leon said in a local radio interview that the board would closely follow the outlook for further interest rate hikes by the U.S. Federal Reserve that could hit the Mexican peso and add to inflation pressures.

But he said the conclusion of a new North American trade deal could spur increased investment to Mexico and underpin the peso currency.

“Until now, the effect of volatility due to rising interest rates in the United States has been dominating, but a better behavior of the exchange rate could consolidate in the future,” he said.

Washington and Ottawa reached an agreement on Sunday after weeks of tense bilateral talks to rework the 1994 North American Free Trade Agreement into the new United States-Mexico-Canada Agreement (USMCA).

Mexico and the United States struck a deal in August.

Mexico’s annual inflation rate rose less than expected in the first half of September and analysts expect the pace of consumer prices increases will cool.

The bank said the effects of higher gasoline and cooking gas prices should be transitory, but they were indirectly slowing the pace of a decline in core inflation by increasing the production costs of goods. (Reporting by Anthony Esposito and Michael O’Boyle; Editing by Lisa Shumaker)

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