UPDATE 2-Mexico industrial output posts surprise monthly drop

MEXICO CITY, July 12 - Mexican industrial output posted a surprise month-on-month drop in May as manufacturing slowed, but indications that activity has picked up since then underpinned expectations the central bank will hold interest rates steady for now.

Production declined 0.93 percent from April, the national statistics agency said on Thursday. That compared to a Reuters poll estimate for a rise of 0.25 percent.

The first monthly decline since February was driven by a decrease in manufacturing output, which fell 1.38 percent. Construction was down 0.65 percent and electricity, water and gas production slipped 0.16 percent from April, the agency said.

Compared to May 2011, production rose 3.1 percent, but that was below expectations for a 3.4 percent increase. The annual figure was hit by weak oil production, which fell 1.9 percent.

To date, robust demand in the United States for Mexican-made goods has helped shield Latin America's second-biggest economy from a wider global slowdown.

Rafael Camarena, an economist at Santander, said carmakers had been busy in June, suggesting manufacturing would rebound.

Data published on Tuesday showed Mexican car output was up by 13.9 percent in June from the same month a year earlier, with auto exports jumping by 21.7 percent. In May, auto production rose by just 2.8 percent on the year.

Mexico's economy grew faster than expected in the first quarter and North American growth is holding up even as Europe slides back toward recession and growth cools in Asia.

The central bank has held its main lending rate steady at 4.5 percent since mid-2009 and after the last rate decision in June it flagged concern that a weak peso could fan inflation.

The peso has strengthened since then and Camarena said after the industry data was released he still believed the bank would leave rates unchanged for the rest of this year and most of 2013.