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Mexico's Carstens sees inflation drifting up to around 3.5 pct in 2014

By Michael O'Boyle

MEXICO CITY, Nov 5 (Reuters) - Mexico's tax overhaul is likely to have only a transitory impact on inflation, which is seen drifting slightly higher to around 3.5 percent next year, central bank chief Agustin Carstens said on Tuesday.

Mexico's Congress passed a package of measures last week aimed at bolstering the country's weak tax revenues, but it is expected to have a moderate impact at best.

Inflation likely cooled in October to 3.34 percent, its lowest since January, according to a Reuters poll, as pressure from fresh food prices faded. Data is due on Thursday.

"The reform will have a relatively small and transitory impact on inflation," Carstens told reporters. "It won't generate inflationary pressures. We think that next year, inflation ... (will be) around 3.5 percent."

Tame price pressures give the central bank room to hold borrowing rates down to help a sluggish economy.

The Banco de Mexico said it was done with easing after cutting rates in October for the second month in a row to an all-time low of 3.5 percent.

Carstens said there were signs that Latin America's No. 2 economy was recovering after it shrank in the second quarter by 0.7 percent, its first contraction in four years.

Growth in the third quarter accelerated to about 0.9 percent compared to the prior three months, the finance ministry said last week.