By Jean Luis Arce

MEXICO CITY, Feb 13 (Reuters) - Mexico's central bank chief Agustin Carstens warned on Wednesday lower interest rates are not a 'done deal' for Latin America's second-largest economy despite his forecasts of tame inflation over the next two years.

In its latest quarterly report, the Banco de Mexico said it expected inflation to be close to the bank's 3 percent target for much of 2013 and 2014 after shooting well above 4 percent for seven months last year.

But traders trimmed bets on a 25 basis point rate cut in March after Carstens declined to endorse market expectations for a cut and said policymakers had not yet made up their minds.

'It's not a done deal,' he told a news conference after repeated quizzing about the central bank's intentions.

'We don't take decisions based on market expectations but based on the drivers of inflation going forward.'

Mexico's central bank has not changed rates since the middle of a deep recession in mid-2009, when benchmark borrowing costs were cut to 4.5 percent. The bank surprised analysts by a U-turn to suggest lower rates after its January rate meeting.

Annual inflation stood at 3.25 percent in Mexico in January, and Carstens said it might accelerate again in March and April due to low readings in the same months of last year, but this would only be temporary.

Interest rate swaps showed a 72 percent chance of a rate cut to 4.25 percent on March 8 after his comments from more than 80 percent earlier in the day.

'We don't think the conditions are there for a cut in March,' said Prognosis economist Erick Urtuzuastegui. 'We'd give it until the second half of the year.'

Still, analysts at Banorte-IXE said they were more confident about predicting a 50-75 basis point cut in March after the central bank stressed fragile global growth.

ECONOMIC OUTLOOK

Mexico notched up growth of around 4 percent last year, far outpacing the performance of its main regional peer, Brazil, but there were signs of weakening towards the end of 2012.

Industrial output posted its biggest monthly decline in nearly four years in December, and some analysts have raised questions about the health of the economy.

Mexico's main share index fell by close to 2 percent on Wednesday following disappointing fourth-quarter results by America Movil, the giant phone company controlled by Mexican Carlos Slim, the world's richest man.

America Movil's chief financial officer Carlos Garcia Moreno told a conference call that the company was facing 'an unexpected slowdown' in the Mexican economy.

Still, the central bank maintained its forecasts for growth in 2013. Carstens said improvement in the U.S. economy would generate stronger Mexican growth and exports in the second half of 2013 and predicted stronger economic expansion in 2014.

The bank expects growth this year to come in a range of 3 percent to 4 percent, on par with its last quarterly review.

In its first forecasts for 2014, the central bank said it expected growth in a range of 3.2 percent to 4.2 percent.

Charts published with the forecasts show a strong probability of inflation consolidating at around 3.2 percent in late 2013 and remaining in that range through 2014.

Even though growth is expected to accelerate, the central bank said it did not see home-grown price pressures ahead, pointing to planned structural reforms which should allow the economy to grow faster without generating inflation.

Carstens said the central bank was watching foreign investment inflows, which helped push the peso up about 8 percent last year, leading gains among riskier assets.

The peso has gained more than 1 percent since the close of 2012. But it has been slowly pulling off a ten-month high since policymakers last month signaled they could cut interest rates.

(Additional reporting by Krista Hughes, Michael O'Boyle, Lorena Segura, Tomas Sarmiento and Alexandra Alper; Writing by Dave Graham and Krista Hughes; Editing by Leslie Adler, Chizu Nomiyama and Kenneth Barry) Keywords: MEXICO CENBANK/ECONOMY

(Alexandra.Alper@thomsonreuters.com)(+5255-5282-7142)(Reuters Messaging: alexandra.alper.thomsonreuters.com@reuters.net)

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