UPDATE 2-Mexican central bank holds rate steady, warns of rise

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By Jason Lange and Noel Randewich

MEXICO CITY, Feb 23 (Reuters) - Mexico's central bank held its benchmark overnight interest rate steady at 7 percent, as expected, on Friday but clearly warned it would act if core inflation does not begin to ease in March.

In comments seen as increasingly explicit, the central bank said it will closely watch core inflation to make sure it starts falling next month.

"If it doesn't, the board will tighten monetary policy in order to bring inflation in line with the goal," the bank said.

The remark hurt the peso as foreign investors dumped Mexican local currency bonds.

"The central bank is putting its cards on the table," said David Franco, an economist at JP Morgan in Mexico City.

Increased prices for many staple foods, including tortillas, have pushed up inflation in recent months. But the central bank says the price rises are only temporary.

On Friday, the bank said that the isolated price increases have not spread to other areas of the economy.