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UPDATE 4-Mexico's central bank holds rates, some see hikes coming

(Adds comments from Banxico board member, economist)

MEXICO CITY, May 13 (Reuters) - Mexico’s central bank on Thursday kept its key interest rate steady in a unanimous decision by its five-member board that reflected growing concerns about the path of inflation and triggered speculation the next move would be a hike.

For the second meeting in a row, the Bank of Mexico, known locally as Banxico, kept the rate unchanged at 4.0%, after cutting it by 25 basis points in February.

Banxico said that inflation expectations for 2021 had risen since its last monetary policy meeting and that the balance of risks for prices had an upward bias.

Economists said this meant the end of the easing cycle that extended through last year as the bank tried to limit the economic damage of the pandemic.

“The next rate move is most likely a hike rather than a cut,” Goldman Sachs’ Alberto Ramos said. “Recent domestic and external developments have been shortening the horizon for liftoff.”

J.P. Morgan said it expected two 25 basis points rate hikes in the fourth quarter to 4.5%.

Ramos said he expects Banxico to keep rates at 4.0% until at least the end of 2021, barring a deterioration of the domestic policy backdrop or an intensification of the hawkish external monetary headwinds.

The U.S. Labor Department on Wednesday reported that the U.S. consumer price index rose 4.2% in the 12 months through April, the largest gain since September 2008, surprising the Federal Reserve. High U.S. inflation pressures prices in Mexico, its top trade partner, while U.S. rates are a factor in Banxico decision making.

Banxico cited external inflationary pressures as the first in a list of four risks to the upside for prices.

The bank said expectations for the medium and long-term periods remained stable above its target and that headline and core inflation are forecast to converge to the 3% target starting in the second quarter of 2022.

“The balance for inflation is on the rise, while that of growth appears balanced,” Banxico board member Jonathan Heath said on Twitter.

Mexico’s annual inflation picked up faster than expected in April to 6.08%, its highest level since December 2017, moving well above the target level of 3%, with a 1-percentage-point tolerance range above and below that.

While a jump was expected because of accounting factors related to lower energy prices in the same period in 2020, the bank said the persistence of core inflation was an increased risk going forward.

All 20 analysts surveyed by Reuters forecast Banxico would leave borrowing costs unchanged on Thursday. (Reporting by Anthony Esposito; Additional reporting by Abraham Gonzalez; Editing by Frank Jack Daniel, Peter Cooney, Paul Simao and Diane Craft)

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