Mexico central bank hikes interest rates to 4.5%, decision split

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MEXICO CITY, Aug 12 (Reuters) - The Bank of Mexico on Thursday raised its key interest rate by 25 basis points to 4.5%, as expected, in a three to two vote by its governing board, which expressed concern about above-target inflation and inflation expectations.

The rate hike, the second in succession by the bank, was in line with the forecast of a Reuters poll of analysts earlier this month, in which 17 of 19 analysts surveyed predicted a 25-basis-point increase.

In its latest monetary policy statement, the bank, known as Banxico, said the balance of risks for inflation within its forecast horizon was biased to the upside.

"Although the shocks that have increased inflation are expected to be transitory, due to their variety, magnitude, and the extended horizon over which they have affected it, they may pose risks to the price formation process," the bank said.

Mexican annual inflation slowed to the lowest level in four months in July at 5.81%, but it exceeded forecasts and stayed well above the central bank’s stated objective.

The bank targets inflation of 3%, with a one percentage-point tolerance range above and below that.

"It was deemed necessary to strengthen the monetary policy stance in order to avoid adverse effects on inflation expectations and enable an orderly adjustment of relative prices and the convergence of inflation to the 3% target," it said.

Bank of Mexico Governor Alejandro Diaz de Leon and board members Irene Espinosa and Jonathan Heath voted in favor of the rate increase, while members Galia Borja and Gerardo Esquivel were in favor of keeping the interest rate unchanged at 4.25%. (Reporting by Dave Graham and Anthony Esposito; Editing by Steve Orlofsky)