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Mexico's central bank seen holding key rate, striking dovish tone

Anthony Esposito

MEXICO CITY, Aug 15 (Reuters) - Mexico's central bank is seen keeping the key interest rate on hold at its monetary policy meeting later on Thursday as a weakening peso risks fanning inflation, though its board will likely adopt a dovish tone pointing to impending rate cuts.

Eleven of the 16 analysts and economists surveyed by Reuters earlier this week said they expect the Bank of Mexico (Banxico) to hold the key lending rate at 8.25%, the level it has maintained since Dec. 20.

Banxico has not cut rates since June 2014.

Escalating trade tensions and the risk of a currency war between the United States and China have led to increased volatility for emerging market currencies, including Mexico's peso. During intraday trading on Monday, the peso slipped to its weakest level since early June.

A weakening peso and the risk it poses for inflation could be the determining factor if Banxico decides to decouple from the U.S. Federal Reserve, which cut its target interest rate on July 31 by a quarter of a percentage point.

"In a close vote, we believe that Banxico will leave the rate at 8.25% on Thursday," BBVA Research said in a note to clients.

Banxico's board members will likely also weigh the possibility of a U.S.-China currency war. Last week, Washington accused Beijing of manipulating its currency after China let the yuan drop to its lowest point in more than a decade

Still, bets for a rate cut are increasing as Mexico's economy sputters and inflation eases.

A cut could help boost the struggling Mexican economy after its paltry 0.1% growth in the second quarter and could be justified after consumer prices rose 3.78% in the year through July, with the pace of inflation slowing for a third straight month.

"A rate cut can be justified and a rate cut is inevitable the only question is the exact timing and that will depend on the Fed, domestic data and the currency," said Christian Lawrence, senior market strategist at RaboResearch.

The bank's five-strong board struck a cautious tone at its last monetary policy meeting on June 27. Still, one member voted for a rate cut and another said that if inflation continues to soften, cuts would be needed relatively soon. (Reporting by Anthony Esposito, Editing by Rosalba O'Brien)