MEXICO CITY (Reuters) - Mexico’s central bank held borrowing costs steady on Thursday and said a string of interest rate hikes was already beginning to slow the pace of a spike in inflation.

Mexican pesos are seen in this picture illustration August 3, 2017. REUTERS/Edgard Garrido/Illustration

The Banco de Mexico board made a unanimous decision to leave unchanged its benchmark rate at 7.00 percent MXCBIR=ECI as expected in a Reuters poll of 18 analysts.

The central bank hiked in its previous seven meetings, taking the rate to a more than eight-year high. It has lifted its main rate by 400 basis points since the end of 2015 to counter repeated slumps in the peso.

In its monetary policy statement, the bank said there were already signs that higher rates were slowing the pace of consumer price gains, after data on Wednesday showed the annual inflation rate in July hit 6.44 percent, its highest since the end of 2008.

It said a surge in tomato prices had driven the annual rate higher, saying if that jump was factored out, the annual rate would have fallen in July to 6.17 percent from 6.31 percent in June.

The annual rate should fall by the end of the year and converge toward its 3 percent target by the end of 2018, the statement said. Private economists see the rate falling to 3.8 percent next year, within its tolerance band of 1 percent.

In an interview with Reuters last month, Banco de Mexico Governor Agustin Carstens said it was likely the bank would pause its cycle of interest rate hikes this month and could extend the pause for some time, but that rate cuts were not likely until late next year. [nL1N1K41XU}

The central bank pointed to the importance of the recovery this year in the Mexican peso MXN=MXN=D2, which has dampened concerns that persistent currency weakness could fan inflation even higher.

Mexico’s peso rallied from a record low in January as U.S. President Donald Trump backed away from threats to impose big tariffs on imports from Mexico and moved toward a renegotiation of the North American Free Trade Agreement.

The central bank said that the outlook for growth had shaken off a downward bias due to the perception that there is a lower chance for a “severe deterioration” in relations with the United States.

Mexico's economy is expected to grow around 2 percent this year, and the market is pricing in interest rate cuts after the middle of next year. BOMWATCH2