UPDATE 1-Mexico central bank says could cut interest rate if growth flags
* Banco de Mexico holds benchark interest rate at 4.5 pct
* Central bank moves to easing bias on rates
* Sees downside risks to growth, tamer inflation
MEXICO CITY, Jan 18 (Reuters) - Mexico's central bank held borrowing costs steady on Friday and said it could cut interest rates if growth flags, dropping a threat to hike after inflation cooled.
The Banco de Mexico left its benchmark interest rate steady on Friday at 4.50 percent, as expected by 20 analysts polled last week by Reuters.
In a statement accompanying its decision, the central bank said downside risks to growth persisted and the balance of risks to inflation had improved. But its move to an easing bias took markets by surprise.
"It may be advisable to reduce interest rates ... to help the economy adjust to a situation of lower economic growth and lower inflation," the central bank said.
At its previous meeting, the central bank had threatened rate hikes and the change in tone pushed the peso down and yields on Mexican interest rates fell as investors began to price in the chance of a cut over the next two years.
Data last week showed the annual pace of Mexican consumer price increases dipped to 3.57 percent in December. The rate has fallen back after hitting a 2-1/2-year high in September, driven by a spike in food costs that has now faded.
Analysts expected the recent exit of deputy governor Jose Julian Sidaoui, who was considered one of the board members most concerned about inflation, would contribute to a statement that expressed less worry about consumer price increases.
Friday's decision was taken by four members as Congress still needs to approve economist Javier Guzman, who was nominated last month by President Enrique Pena Nieto in his first month in office.
Inflation expectations have remained largely stable. A poll from Banamex last week showed the median of economists expect the annual rate will end 2013 at 3.79 percent, up 4 basis points from a poll in December.
Solid U.S. demand has helped shield Mexico from more sluggish growth around the world. Still, Latin America's second-biggest economy is seen slowing from an expected 3.9 percent in 2012 to 3.5 percent this year, according to the government.