UPDATE 3-With eye on inflation, Mexican central bank holds rates steady

(Adds analyst’s comments, details)

MEXICO CITY, Nov 12 (Reuters) - Mexico’s central bank unexpectedly kept its benchmark interest rate unchanged at 4.25% on Thursday, citing the need for a “pause” to weigh inflationary pressures as it held borrowing costs steady for the first time in nearly 1-1/2 years.

Four of the five members of the governing board of Banxico, as the central bank is known, voted for the decision, with one voting to reduce the key rate by 25 basis points to 4.0%, showing there was still some appetite for cuts.

The central bank had been expected to lower the rate to 4.0%, which would have been the 12th consecutive cut since its August 2019 meeting, a Reuters poll showed.

“This pause provides the necessary room to confirm that the trajectory of inflation converges to the target,” Banxico said in a statement on its first decision to hold rates steady since June 2019.

Mexico’s annual inflation accelerated slightly faster than expected in October to a 17-month high of 4.09%, taking it further above Banxico’s upper tolerance threshold.

Banxico targets an inflation rate of 3%, with a one percentage point tolerance band above and below that level.

The peso briefly trimmed losses against the dollar following the bank’s decision.

“That was not expected by the market, but the pause is going to generate a lot of discussion,” Deputy Finance Minister Gabriel Yorio said after the bank’s announcement.

Mexican President Andres Manuel Lopez Obrador had himself pushed for lower borrowing costs, saying on Oct. 23 that rates were still high and must fall further for people to take out loans and help the economy recover.

Analysts say that could still happen.

“Banxico didn’t draw a line under the easing cycle. One member voted for a 25bp cut and the minutes from the last meeting suggest that two more out of the five on Banxico’s board may be sitting on the fence,” said William Jackson, chief emerging markets economist at Capital Economics.

The bank’s use of the word “pause,” the peso’s recent rally against the dollar and the ongoing effects of the coronavirus pandemic on the economy meant the argument for more policy support will remain strong, Jackson said.

Banxico said the recent behavior of headline and core inflation, and the factors affecting them, imply a slight increase in their foreseen trajectories within the forecast horizon.

The challenges for policymakers posed by the pandemic included both the impact on economic activity, financial shock and their effects on inflation, the bank said. (Reporting by Dave Graham, Frank Jack Daniel and Anthony Esposito; Additional reporting by Sharay Angulo; Editing by Alex Richardson and Paul Simao)