UPDATE 2-Mexico holds key rate steady, fears US recession

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By Jason Lange and Noel Randewich

MEXICO CITY, Jan 18 (Reuters) - Mexico's central bank held its key overnight interest rate steady at 7.50 percent on Friday, but warned that a looming U.S. recession could hurt Mexico's economy.

Mexico sends more than 80 percent of its exports to the United States, making it sensitive to the economic ups and downs of its northern neighbor.

The central bank said in its monthly policy review that inflation is within its forecast range, which calls for the pace of price rises to drop toward 3 percent by 2009.

More expensive food has not led to inflation in prices of other goods so far, it said, but added:

"The increases in food prices ... will continue to be a central cause for concern."

The bank cautioned that a recent slowdown in Mexico's economy could worsen this year if the United States tumbles into a recession, as many experts expect.

"They emphasize that there are signs of slower growth and that things could get worse while the inflation outlook remains more or less unchanged," Mexico City-based HSBC economist Juan Trevino said.

As long as inflation trends remain within the expected range, the bank will be unlikely to raise rates MXCBIR=ECI, UBS economist Guillermo Aboumrad said in a report on Friday.

Mexico's consumer prices rose 3.76 percent in 2007, the central bank reported last week, at the high end but still within the bank's target range of 2 percent to 4 percent.

However, the bank has warned that higher food prices and a tax hike will likely keep inflation above 4 percent for most of this year.

Inflation across Latin America has jumped as rapidly developing economies like India and China raise global demand for food commodities, while increasing amounts of grains are being diverted for use in making biofuels.

Mexico's peso MEX01 MXN= traded at 10.9150 per dollar after the bank's rate policy announcement, maintaining a gain of about 0.33 percent.

In the United States, investors expect the Federal Reserve to cut interest rates this month by at least half a percentage point to protect the economy from a possible recession, increasingly predicted by experts.

Last week, Mexican central bank governor Guillermo Ortiz said a new tax on businesses, part of a fiscal overhaul package passed last year, would probably cause less inflationary pressure than previously feared. (Editing by James Dalgleish)