* Annual inflation rises 4.25 pct, vs Reuters poll 4.19 pct
* Uptick in inflation limits central bank room to cut rates
* Peso firms to 20-month high after data
MEXICO CITY, April 9 The Mexican annual inflation rate climbed above the central bank's target ceiling in March, crimping policymakers' ability to lower borrowing costs as the peso currency soared to 20-month highs.
Inflation in the twelve months through March rose to 4.25 percent, the national statistics agency said on Tuesday, above February's 3.55 percent increase and faster than expectations for a 4.19 percent rise in a Reuters poll.
The brisk jump past the central bank's 4 percent limit for inflation for the first time in four months raised the risk that prices may not fall back toward 3 percent in the second half of the year, as policymakers predicted.
"The shock on inflation so far has been pretty substantial," said Benito Berber, an analyst at Nomura in New York. "There is more probability that it remains above 4 percent in the second half of the year."
Mexico's peso firmed to its strongest level since August, 2011 after the data.
Mexico's central bank cut its benchmark interest rate to an all-time low of 4 percent in early March in what was seen as a bid to tamp down the appeal of the currency, but the peso has kept gaining, up about 6 percent this year.
Further sharp gains in the peso could begin to hurt the country's exporters, a key source of economic growth. But policymakers will have little room to act until inflation pressures cool, analysts said.
A further interest rate cut by the bank with inflation above 4 percent could risk hurting investor confidence in policymakers' commitment to containing consumer price increases.
Meanwhile, the strong peso could help limit inflation pressures by bringing down import costs, analysts said.
"In this context, while uncomfortable with the pace of appreciation, the central bank could be willing to tolerate a stronger currency," JPMorgan analyst Gabriel Lozano wrote in a note, adding he expects the central bank to hold interest rates steady all year.
However, others said the central bank could look to cut interest rates again later this year if the peso keeps firming and inflation falls back around 3.5 percent.
FRESH FOOD PRESSURES RISE
Consumer prices rose 0.73 percent in March, up from 0.49 percent in February and above the 0.67 percent expected in a Reuters poll.
A surge in volatile fruit and vegetable costs due to bad weather drove much of the increase.
Inflation is expected to get a bump higher in April when the national statistics institute introduces a new weighting.
Among the changes, analysts said, would be a lower weighting to electricity costs. That will dampen the impact of summer electricity subsidies, set to start in April, on the overall measure of consumer prices and effectively drive prices higher.
The core price index, which strips out some volatile food and energy prices, rose 0.30 percent, compared with an expected 0.37 percent increase and a 0.51 percent rise in February.