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Mexico central bank expects Trump policies to weaken 2017 growth

MEXICO CITY (Reuters) - Mexico's central bank revised down its 2017 economic growth forecast on Wednesday to between 1.3-2.3 percent, citing myriad risks to Latin America's No.2 economy from expected protectionist policies by U.S. President Donald Trump.

In a quarterly report on inflation, the bank said that policies proposed by Trump had already influenced consumer and business confidence, foreign direct investment and remittances to Mexico, as well as souring relations.

Trump, who softened his tone on immigration in a speech on Tuesday, has for months railed against Mexico's "unfair" advantage under the North American Free Trade Agreement, while warning U.S. companies not to invest south of the border.

"The central growth scenario in this report incorporates a certain deterioration in expected trade flows between Mexico and the United States, and lower foreign direct investment than was previously foreseen," the bank said.

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The bank also trimmed its 2018 growth forecast to between 1.7-2.7 percent.

The report forecast inflation would remain above its 4 percent target limit for most of 2017, before trending down by year-end and converging close to 3 percent by the end of 2018.

Central Bank Governor Agustin Carstens called the current spike in prices "transitory," and said it would be expensive to try to combat price hikes caused by fuel price rises and volatility in the peso currency.

He said measures taken by the central bank, which has raised rates by 325 basis points since December 2015, were anchoring inflation expectations in the medium and short term.

The peso firmed more that 1.3 percent on Wednesday after Trump's speech to the U.S. Congress, which he did not use to lambast Mexico. The peso has recovered from historic lows hit after Trump's election, partly because of slow progress in starting NAFTA renegotiations.

(Reporting by Michael O'Boyle and Alexandra Alper; Editing by Grant McCool)