UPDATE 2-Mexico holds rates steady, hike seen next year

* Mexico central bank leaves key rate unchanged

* Policymakers say factories, consumers rebounding

* IRS market shows increase in bets on early 2011 rate hike
(Adds quotes from economists, background)

By Jason Lange

MEXICO CITY, July 16 (BestGrowthStock) – Mexico left bank lending
rates low on Friday to boost its weak economy but policymakers
saw signs of economic strength and reinforced expectations they
were preparing to raise borrowing costs next year.

As was widely expected, the central bank left its target
for overnight bank lending at 4.5 percent, the lowest level
since the bank adopted a reference rate in 2005.

However, the bank said factory exports were growing
quickly, consumer spending showed signs of improvement and a
recent fall in inflation appeared temporary.

“It still seems that they won’t move rates until next
year,” said Santander economist Rafael Camarena.

The yield on the 9-month Mexican interest rate swap
(MXNIRS9M=RR: ) rose following the bank’s comments, showing
investors raised bets on an interest rate hike early next year.

Mexico is limping back from a deep recession that was
caused by a plunge in U.S. demand for its exports during the
global financial crisis.

While factories have bounced back this year, consumer
spending remains depressed, holding back the recovery.

“Manufacturing exports have been reflecting dynamic U.S.
industrial activity,” the central bank said in its monthly
policy statement.

“Private consumption and investment are still lagging,
although recently they have showed some improvement,” it said.

Mexican consumer prices fell for three straight months
through June but the bank said recent price drops were largely
due to seasonal factors.

The bank said it expects the annual inflation rate, which
fell to 3.7 percent in June, to rebound later this year.

“You can see between the lines that the next move will be a
hike,” said IXE economist Luis Flores.

The decision to keep the rate steady was forecast by all 20
economists consulted in a Reuters poll.
(Additional reporting by Robert Campbell, Lorena Segura and
Jean Luis Arce; Editing by Andrew Hay)

UPDATE 2-Mexico holds rates steady, hike seen next year