Mexico peso rallies to near 5-year high; stocks dip

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MEXICO CITY, May 16 (Reuters) - Mexico's peso soared on Friday to its highest level in almost five years as investors bet the central bank could raise interest rates this year despite a statement from policy makers widely seen as neutral on the direction of monetary policy.

The peso <MXN=>MEX01 rose 0.59 percent to 10.415 per dollar at the official central bank close, its strongest level since July 2003. This year, the peso has gained nearly 5 percent.

The benchmark IPC index .MXX was little changed, falling 0.18 percent to 31,486.95 points, weighed down by losses at telecommunications bellwether America Movil.

Mexico held interest rates steady on Friday as policy makers balanced worries about a spike in inflation with concern that a U.S. slowdown could hit the economy.

However, market players still are betting that the central bank could raise rates this year. That would widen the spread between the U.S. target interest rate and Mexico's key rate, making peso-denominated assets more attractive to investors.

Producers of staple corn tortillas said this week they could raise prices sharply this year, leading investors to increase bets in the interest-rate futures market that the central bank will have to hike rates.

"The truth is that if tortilla prices go up, that could push inflation above the upper bound of the central bank, and that would force them to raise rates," said Benito Berber, an economist at RBS Greenwich Capital in Greenwich, Connecticut.

However, Berber said it was likely that the government would be able to reach an agreement with tortilla producers to keep prices from rising dramatically.