UPDATE 1-Mexico inflation in early May rises less than expected

(Adds background)
    MEXICO CITY, May 24 (Reuters) - Mexico's annual inflation
rate rose less than expected in early May and the rate was still
below the central bank's target, data showed on Tuesday, but
policymakers could still raise interest rates after a deep slump
in the peso.  
    Inflation in the 12 months through mid-May was 2.53
percent, the national statistics institute said,
below a forecast 2.72 percent rate in a Reuters poll and up from
2.48 percent in the second half of April.
    Mexican inflation hit successive record lows last year, but
the annual pace of price gains began to rise in January.
    The central bank expects inflation to rise slightly above
its 3 percent target during 2016, but fall back toward the
target by the end of the year.
    Still, yields on Mexican interest rate swaps show
investors are betting the central bank may hike its benchmark
interest rate at its next meeting in late June after a sharp
drop in the peso currency. 
    The central bank held its main interest rate at 3.75 percent
in early May, but warned it could raise borrowing costs if a
weak peso begins to hit inflation expectations. 
    The peso has shed nearly 7 percent this month against the
dollar, heading back toward the record low seen in February that
pushed the central bank to unexpectedly raise interest rates and
intervene in the market.
    Consumer prices fell 0.48 percent in the first half of
May, compared to expectations for a drop of 0.29
percent, helped by summer electricity subsidies kicking in. 
    The core index, which strips out some volatile food and
energy prices, rose 0.08 percent, below an expected
0.11 percent.
    The 12-month core inflation rate rose to 2.92 percent
, below the poll's expectations of 2.95 percent and
compared with 2.87 percent in the second half of April. Still,
it was the highest core rate since the end of 2014.

 (Reporting by Michael O'Boyle; Editing by Frances Kerry)