Mexico inflation hits over 2-year high on food price surge

* Annual inflation highest since March 2010 at 4.42 pct

* Main driver is egg and fresh produce prices

* Markets stick to bests interest rates will stay on hold

MEXICO CITY, Aug 9 (Reuters) – Mexican annual inflation accelerated to its highest rate in more than two years i n July on a surge in egg and fresh produce prices, but bets did not waver that policymakers will hold interest rates steady in the coming months.

Annual inflation rose to 4.42 percent last month, i n line with expectations in a Reuters poll and up from 4.34 percent in June, the national statistics agency said on Thursday.

July’s inflation marked the fastest full-month pace since March 2010, well past the central bank’s limit of 4 percent, but the most pressure came from higher egg and produce prices following an outbreak of avian flu in western Mexico and bad weather which has affected crops.

Central bank board member Manuel Sanchez told Reuters on Tuesday the spike in inflation will be temporary. Policymakers are expected to keep the benchmark interest rate at 4.50 percent this year to protect Mexico from the risk of a deeper global slowdown.

“Inflation pressures will persist, so it seems hard to believe they could lower rates ahead, but they will not hike either with a global environment where other banks are lowering rates,” said Alejandro Padilla, an analyst at Banorte-IXE in Mexico City.

U.S. demand for Mexican exports has supported growth in Mexico so far this year despite a global slowdown in Europe and Asia that has pushed Brazil to slash borrowing costs to support growth.

Yields on interest rate swaps were little changed as the market stuck to bets that Mexico will hold its benchmark interest rate steady at 4.50 percent into 2014 despite signs of a slowdown in the United States, Mexico’s top trading partner, which could weaken growth ahead.

Consumer prices rose 0.56 percent in July compared with Reuters poll estimates of 0.55 percent and a 0.46 percent increase in June.

Egg prices surged 15.19 percent over the year while chicken prices were up 3.92 percent, root vegetables 21.5 percent and oranges up 24 percent. Annual inflation in agricultural prices was 11.27 percent, more than double the rate recorded two months ago.

Core inflation, which strips out some volatile food and energy prices, rose 0. 3 1 percent c ompared to an expected 0.27 percent and a 0.22 percent rise in June.

Mexican policymakers have worried that a weak peso could fan inflation since it weakened fast past 12 per U.S. dollar last year. A weaker currency makes imported goods more expensive for domestic consumers in peso terms.

The currency has recovered about 11 percent from a three-year low hit in early June to trade at 13.1650 per dollar on Thursday.

Non-food core goods inflation rose 3.6 percent in the 12 months through July, up from 3.29 percent in June, suggesting the weak peso is pushing up prices since imports are more expensive due to the weak peso.

Central bank board members noted in their July meeting that the output gap had closed, which could signal the start of home-grown price risks.

However, core services prices, a key gauge to measure if economic growth is pressuring prices, rose only 2.5 percent in twelve months through July.

Mexico’s economy accelerated at the start of 2012 but data suggests growth eased in the second quarter, w ith gross domestic product figures on the period due on Aug. 16.

Reuters