Mexico central bank holds interest rate, flags U.S. election risk

By Alexandra Alper and Luis Rojas

MEXICO CITY (Reuters) - Mexico's central bank held borrowing costs steady on Thursday, flagging weaker growth and warning that uncertainty around the U.S. presidential election might cause deeper peso losses that could fan inflation.

The Banco de Mexico left its key rate at 4.25 percent, as expected by all 17 analysts surveyed by Reuters last week, after a unanimous 50-basis-point hike in June to keep a weak peso from hitting consumer prices.

The peso , has recovered somewhat, firming nearly 7 percent since hitting an historic low of 19.5225 per dollar on June 24, the day after Britain's Brexit vote sent shockwaves through global markets.

But central bank policymakers said they cannot rule out a deeper slump, given the U.S. election in November, the possibility of weak oil prices and further U.S. Federal Reserve tightening.

U.S. Republican presidential nominee Donald Trump kicked off his campaign last year saying Mexico was sending rapists and drug dealers across the border, and some analysts have forecast a Trump win could weaken the peso beyond 20 per dollar.

The central bank said its inflation outlook was neutral and stuck to its forecast for inflation to close the year slightly above its 3 percent target and be around 3 percent next year.

Mexican consumer prices rose 2.65 percent in the year through July, data showed this week, but remained below the central bank's target, giving the bank room to hold rates steady.

But it said the growth outlook has deteriorated on a stagnant industrial sector and disappointing services industry. Data earlier on Thursday showed industrial output barely rose in June, dragged down by mining, which includes oil output.

Faced with global risks, Mexico's government should take further measures to consolidate public finances such as aiming for a primary budget surplus next year, the bank's policymakers said.