The central bank may shave as much as 0.5 percentage point off the overnight rate by year-end, Solorzano said, according to a July 5 interview with Bloomberg News in Mexico City.

The outlook for rates depends on the strength of the peso and the economy in the U.S., which buys about 80 percent of Mexico's exports, said Luis de la Calle, the Mexican economist who helped negotiate the North American Free Trade Agreement. A peso rally would force the bank to lower rates this year because it would staunch exports by making them more expensive in dollar terms, he said.

"They'd get nervous and would lower the interest rate,"
said De La Calle, who is now a partner at Mexico City-based business adviser De la Calle, Madrazo, Mancera SC.

Economic Recovery
Economists have raised forecasts for Mexican growth on speculation the nation's manufacturers will benefit from revived U.S. demand for goods from refrigerators to cars, boosting Mexican employment, incomes and consumption. Mexico's gross domestic product will expand 4.4 percent this year, up from a 3.3 percent projection in January, as it recovers from the deepest recession since 1932, according to the average estimate of economists in a Banco de Mexico survey published July 1.

Carstens has no reason to cut interest rates, said Fernando Alvarez Toca, chief executive officer of Banco Compartamos SA, the Mexican bank that lends to low-income consumers. "Mexico is already seeing signs of a recovery," Alvarez Toca said.

By keeping rates on hold, the bank is closing in on its inflation target while helping the economy rebound, according to Paulo Leme, chief Latin America economist at Goldman Sachs Group Inc., speaking from Miami.

"Some observers derogatorily labeled Carstens a dove," Leme said. "He has the right neutral stance. In terms of monetary policy, you always have to be ahead of the curve."

Eoin Treacy's view Mexico has received a great deal of negative press stemming from the drug war where thousands have died in the last few years. However, the stock market has marched steadily higher from its 2008 low and is among a handful of Asian and Latin American markets to have surpassed its pre-crisis peak. There are a number of factors driving this growth not least the low interest rate environment, thriving domestic demand growth, limited agriculture price inflation and the historically weak, but improving, position of the Peso.

The MEXBOL Index has been consolidating in the region of the 2007 high, mostly above 30,000 since November and continues to find support in the region of the 200-day MA. A sustained move below 30,000 would be required to question scope for a successful upward break.

Mexico's financial sector is a somewhat esoteric case because none of the largest banks operating in the country are included in the parent Mexbol Index. Neither HSBC, Citibank, BBVA nor Scotiabank appear in the index which means that the banks with the largest weighting are Grupo Financiero Banorte and Grupo Financiero Inbursa at weightings of 3.81% and 2.79% respectively. WalMart Mexico also offers banking services and is a leading company in the index. It broke successfully above the 2007 high in November and found support at the 200-day MA in May. A sustained move below MXN28 would be required to question the consistency of the medium-term advance.

As in a number of other countries the food and beverage sectors continue to outperform. Grupo Bimbo found support in the region of the 200-day MA from May and would need to sustain a move below it to question the consistency of the medium-term uptrend. (Also see Comment of the Day on February 19th). This sequence would need to be taken out to question scope for further upside. Fomento Economico Mexicano broke upwards to new highs in October 2009 and has been unwinding the overbought condition since. It is currently rallying, having found support in the region of the 200-day MA and a sustained move below MXN52 would be required to question scope for further upside.