By Michael O'Boyle and Alexandra Alper
MEXICO CITY, July 12 (Reuters) - Mexico's central bank said on Friday that risks to the economy had increased, yet it hinted it will likely hold interest rates steady as global markets try to gauge when the U.S. Federal Reserve will begin to curb its stimulus measures.
The Banco de Mexico left its benchmark interest rate at 4 percent, in line with the expectations of analysts in a Reuters poll.
Fears the U.S. Federal Reserve could start to cut back its stimulus program this year have hammered the Mexican peso as investors bet tighter U.S. monetary policy would draw out funds that had sought higher yields in Mexico.
The central bank noted the 'fragility of the external environment and volatility in international financial markets,' which analysts said suggest the central bank has largely been sidelined from acting until the Fed provides a clearer plan.
'The truth is, they do not have much room to maneuver,' said Marco Oviedo, an analyst at Barclays in Mexico City. 'This proves that Banxico it waiting on other events in order to make any move.'
Yields on Mexican interest rate swaps were little changed as investors stuck to bets that project steady Mexican borrowing costs into the middle of next year - when some think the Fed could start to tighten, and Mexico, too.
A pick-up in U.S. job growth is expected to help boost demand for exports from Latin America's second-biggest economy, and the central bank said Mexican growth should accelerate in the second half of the year.
'Still, due to the quickness and depth with which the economic slowdown has happened, the downside risks for economic activity have increased,' the bank wrote in its statement.
Still, data on Friday showed Mexican industrial output rose at its fastest pace in nearly a year in May on stronger manufacturing and construction activity, partially offsetting a deep slump the prior month.
Mexico's government cut its growth estimate for 2013 to 3.1 percent from 3.5 percent about two months ago, after a weak start to the year.
The central bank said that the balance of risks for inflation had improved. Mexican annual inflation cooled to a four-month low of 4.09 percent in June, cooling after a surge in fresh food prices.
Policymakers stuck to their previous view that the annual inflation rate would be between 3 percent and 4 percent in the second half of 2013, below policymakers' 4 percent ceiling.
Mexico's peso sank to its weakest in nearly a year last month, but it has since bounced back to trade around 12.80 this week, pushing the cost of dollars in pesos back below the psychological 13-per-dollar level, but well above the levels near 12 that could crimp exporters' profits and slow growth.
The central bank said a recent sharp slump in the peso currency had not spurred any inflation pressures. The peso's losses have assuaged policymakers' previous worries that it was becoming too strong.
In March, the central bank cut its benchmark rate for the first time in nearly four years in what was seen as a bid to reduce the appeal of local assets to yield-hungry investors.
(Editing by Nick Zieminski) Keywords: MEXICO ECONOMY/RATES
(email@example.com)(+5255-5282-7153)(Reuters Messaging: firstname.lastname@example.org)
Copyright Thomson Reuters 2013. All rights reserved.
The copying, republication or redistribution of Reuters News Content, including by framing or similar means, is expressly prohibited without the prior written consent of Thomson Reuters.