Mexico central bank seen holding key rate, pointing to future hikes

By Anthony Esposito

MEXICO CITY (Reuters) - Mexico's central bank is expected to keep its benchmark interest rate unchanged on Thursday after five consecutive hikes, on the back of the peso's recent rally and in spite of above-target inflation.

The peso weakened to successive historic lows after the November election of U.S. President Donald Trump, who has threatened to scrap the North American Free Trade Agreement (NAFTA), prompting the Banco de Mexico to hike rates to a nearly 8-year high to prevent the weak peso from fanning inflation.

But the peso has clawed back this year, to become one of the world's best performing currencies on bets Trump would not impose big tariffs on Mexican exports to the United States and as initial talks about trade have taken a more constructive tone.

The stronger local currency led 17 of the 25 analysts and economists surveyed by Reuters to say this week that they expect the central bank to keep the rate steady at its current 6.5 percent.

"The central bank will likely remain vigilant and focused on anchoring the inflation dynamics and the currency, but also aware of the latent risk that if it overreaches on the monetary front, i.e., if it embraces an overly restrictive monetary stance, the central bank could itself become a risk to the economy," Goldman Sachs economist Alberto Ramos wrote in a note to clients.

Still, as annual inflation is running at its fastest pace in nearly eight years, with consumer prices rising 5.82 percent in the year through April, the bank's tightening cycle is likely not over.

Goldman Sachs' Ramos said he expects the key rate to be left unchanged on Thursday, with Banco de Mexico tracking an expected U.S. Federal Reserve hike in June.

Speaking at an event in Washington in April, Banco de Mexico chief Agustin Carstens signaled the cycle of monetary tightening might not be over, saying that there were "still some issues that need to be taken care of."

A minority of analysts believe that tightening may occur on Thursday.

Seven of the economists polled by Reuters expect a 25 basis point hike to 6.75 percent and one forecast an increase to 7.0 percent.

"We acknowledge this will be a close call," said Benito Berber, an analyst at Nomura in New York.

(Reporting by Anthony Esposito; editing by Diane Craft)

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