UPDATE 2-Mexico holds key rate steady, food prices a worry

(Adds background, peso price, analyst quote)

MEXICO CITY, Feb 15 (Reuters) - Mexico's central bank held its key overnight interest rate MXCBIR=ECI steady at 7.50 percent at its monthly review on Friday, as expected, as it balances niggling inflation with a nascent economic slowdown.

The bank said it remains vigilant over the balance of risks with an eye toward reaching 3 percent annual inflation, as food prices continue to be the key concern, although they have not caused wider price increases to date.

At the same time, the bank said inflation has stayed within its forecast range in recent months, and that a slowdown in Mexico's economy that began in the fourth quarter could worsen as the U.S. economy cools.

That could pave the way for a rate cut later in the year if the slowing economy naturally puts a lid on price increases as businesses are forced to keep competitive in an ever more challenging economic environment.

"What catches our eye is that it seems the door is being opened for a cut in interest rates as soon as March," said Octavio Gutierrez, analyst with BBVA-Bancomer bank.

"In an environment where the economic risks are becoming more important ... and prices are within forecast ranges. I believe there could be a possible cut," he said.

The bank has forecast inflation would be between 3.75 and 4.25 percent in the first quarter of this year. Annual inflation was at 3.70 percent in January, down 6 basis points from the prior month and just below the bank's expectations.

While price data for January was surprisingly tame, analysts say the figures did not dispel the central bank's concerns about inflation trends for the rest of the year.

Central Bank chief Guillermo Ortiz told reporters this month grain prices will probably stay high -- because of strong demand from expanding emerging economies like India.

Mexican interest rate futures TII: suggest investors are betting the central bank will cut its benchmark overnight rate by perhaps a quarter of a percentage point from 7.50 percent around mid-year.

The bank said recently it is in a bind because although the economy is easing, inflation is seen staying above its tolerance limit for much of this year due to high world prices for food like wheat and corn and a tax hike enacted this year.

The peso currency MXN= MEX01 held near its strongest in three months against the dollar but weakened 0.07 percent to 10.7595 per dollar. (Reporting by Jason Lange, Inaki Maillard, Vanessa Padilla, Luis Rojas and Chris Aspin; Editing by James Dalgleish)