Source: Reuters UPDATE 4-Mexico's central bank cuts rates, eyes Fed swaps Published: 22 Mar 2009 17:14:07 PST

* Central bank cuts benchmark interest rate 75 bps

* Cut aimed at boosting flagging economic growth

* Central bank: Likely will activate Fed swap line soon

* Bank's Ortiz sees slump bottoming in 2nd-half '09 (Recasts; adds central banker's comments, analyst's quote)

MEXICO CITY, March 20 - Mexico's central bank went on the offensive to counter a sharp economic downturn on Friday, slashing interest rates and pledging to activate a line of credit with the U.S. Federal Reserve.

The central bank lowered its key interest rate by 75 basis points to 6.75 percent, surprising investors who had expected a repeat of a tepid 25 basis-point cut ordered in February.

Mexico's exports have collapsed as U.S. consumers buy fewer cars, televisions and other products made in Mexican factories, which have laid off hundreds of thousands of workers. The bank hopes lower borrowing costs will stem some of that bleeding.

The bank also toned down its concerns about inflation, which is running near a seven-year high, and suggested that it was planning more interest-rate cuts.

"The direction is clear" for monetary policy, Central Bank Gov. Guillermo Ortiz said in a radio interview, adding that the slowing economy was lowering inflation pressures significantly.

Mexico slowed the pace of its rate cuts last month after a 50-basis-point reduction in January as it worried that a steep fall in the peso's value was fueling inflation. It repeated those concerns on Friday in its monthly monetary policy statement, but noted that market turbulence had eased recently.

"The central bank has woken up to the reality that the economy is so weak that its worries about inflation right now were a mistake," said Pedro Tuesta, an economist at 4Cast consultancy.

PESO'S HEALTH A CONCERN

The bank said the Mexican economy would contract during the first quarter at a similar pace to the 1.6 percent contraction seen during the fourth quarter of last year.

Mexico's peso has lost around 30 percent of its value against the dollar since a high reached last August amid growing pessimism that the U.S. downturn is driving Mexico into its deepest recession since 1995.

In a move aimed at boosting the peso, Ortiz said Mexico would probably activate its $30 billion line of credit with the Fed soon to help Mexican companies refinance their debt.

In a separate interview on Mexican television, Ortiz said Mexico's economy will continue to weaken during the first half of this year. Asked when it would hit bottom, Ortiz said he expected "in the second half of the year."

Finance Minister Agustin Carstens told Mexico's Televisa network that he would like to see the battered peso back below 14 per dollar.

"Below 14 would be an acceptable level," Carstens said.

Ortiz and Carstens spoke with Televisa at an annual banking convention in the Pacific beach resort of Acapulco.

Mexico's Deputy Finance Minister Alejandro Werner said on Thursday that Mexico's economy could shrink as much as 1.9 percent in 2009 -- a gloomier outlook than previous government predictions of a contraction of up to 1.0 pct.