June 8, 2012 / 5:00 AM / 7 years ago

Mexico expected to keep interest rates unchanged after peso slump

* Policymakers expected to leave key rate at 4.50 pct

* Weak peso could threaten inflation outlook

MEXICO CITY, June 9 (Reuters) - Mexico’s central bank is expected to keep interest rates steady on Friday after it recently raised its growth outlook and a slump in the peso currency threatens to fan inflation higher.

Analysts polled by Reuters last week all said they expected policymakers to keep benchmark interest rates on hold at 4.50 percent and the market is also betting on steady borrowing costs into 2014.

Inflation is edging up towards the central bank’s 4 percent upper limit and analysts said a sharp fall in the peso last month had likely unnerved policymakers who had looked earlier this year to be leaning toward lowering borrowing costs.

The central bank has said an improvement in global markets - code for a solid peso - is one precondition for a rate cut.

“At the last meeting, they almost made it a precondition for a rate cut if there is financial stability,” said Rafael de la Fuente, an economist at UBS in New York.

“What we are looking for is any indication that they could be more flexible in the conditions under which they are willing to consider a cut,” he said.

Since last year, Mexico’s central bank has suggested it could move to cut interest rates if the U.S. Federal Reserve enacts a third round of large-scale bond buying.

Mexico slashed rates following the credit crisis in late 2008 to counter a deep recession, but has kept its key rate steady since mid-2009.

The peso has fallen 8 percent since the central bank’s last policy meeting in April. Although it has bounced back from a three-year low hit last week, analysts expect concerns about Europe’s debt troubles to keep it under pressure in coming weeks.

Mexico’s economy started the year strongly, helped by demand for its manufactured goods in the United States. The central bank lifted its growth forecast for 2012 in May to a range of from 3.25 percent to 4.25 percent.

The annual inflation rate rose to 3.85 percent in May. Core services inflation is increasing, but this remains well below 3 percent and shows only a gradual acceleration in home-grown price pressures.

Inflation is expected to rise in coming months but then to fall back by the end of the year to 3.65 percent, according to a monthly central bank poll of analysts carried out at the end of May and published on June 1. (Reporting by Michael O’Boyle and Krista Hughes; Editing by David Brunnstrom)

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