UPDATE 2-Mexico cuts rates one last time to fight recession

* Central bank cuts interest rates by 25 basis points

* Policy-makers say rates are on hold for now

* Bank says economy will preform better in second-half '09
(Adds analyst comment, details, background, market reaction)

By Pedro da Costa and Jason Lange

MEXICO CITY, July 17 (Reuters) - Mexico cut its benchmark
interest rate by a quarter percentage point on Friday, but said
it was done lowering borrowing costs for now because a deep
recession would soon ease.

Slammed by the U.S. downturn, Mexico's economy is seen
contracting this year at its worst pace since the Great
Depression.

It was the seventh rate cut by the central bank in as many
months and, as expected, took Mexico's benchmark overnight
lending rate to 4.50 percent MXCBIR=ECI, its lowest in six
years.

"Is that enough to turn things around? That is still a
difficult question to answer," said Enrique Alvarez, head of
Latin America research at IDEAglobal in New York.

Central banks around the world have chopped interest rates
to cushion the blow of a global crisis.

The central bank said in its statement that it had decided
"to pause the current cycle of monetary easing." Policy-makers
had already telegraphed as much in June.

Mexican factories have been hit hard by a downturn that
began in the United States, and the economy will probably to
shrink 6.3 percent this year, according to economists polled by
the central bank in late June.

Inklings of stabilization in U.S. factories have raised
hopes that the worst for Mexico, too, may have passed.

Mexico's economy is highly dependent on its northern
neighbor, with about 80 percent of the country's exports
directed at the United States.

"We expect the economy in general to perform better during
the second half of the year," the central bank said.

Such optimism helped the Mexican peso extend gains
following the central bank's decision.

But economists say monetary policy is limited in Mexico
because many Mexicans don't borrow to shop. A pickup in U.S.
consumer demand is required for a sustainable Mexican rebound.

Complicating things for policy makers, Mexico's inflation
rate remains far above the central bank's target of 3 percent,
though it eased to 5.74 percent in the year through June.
This limits the central bank's room for maneuver in case the
bout of contraction lasts longer than economists currently
expect.

"There is a worry about the risk of overdoing the monetary
policy cycle and then being forced to hike before they would
like to," said Gabriel Casillas, economist at UBS.

While the U.S. economy has shown some signs of improvement,
many sectors, including housing and the labor market, remain
severely depressed.

This weakness is also reflected in Mexico, where industrial
output is expected to have plunged 12.5 percent in May compared
to the same month last year. [ID:nN15342093]
(Additional reporting by Michael O'boyle)