July 8 (Bloomberg) -- Mexico's peso advanced on expectations that tomorrow's central bank report will show inflation quickened last month, increasing the chances of further interest rate increases.

Mexico's inflation reached an annual rate of 5.25 percent in June, according to the median estimate of 23 economists surveyed by Bloomberg. The central bank targets inflation of no more than 4 percent.

``The spread between Mexican interest rates and U.S. interest rates should remain attractive for investors,'' said Roberto Galvan, a currency trader with Intercam Casa de Cambio SA.

The peso advanced 0.19 percent to 10.3155 pesos per dollar at 5:18 p.m. New York time, from 10.3347 yesterday. The currency has appreciated 5.7 percent this year, buoyed by the widening gap between U.S. and Mexican benchmark interest rates.

The central bank last raised its key interest rate a quarter-percentage point on June 20, saying the country's inflation was ``worrying.'' Four days later, the bank reported that consumer prices rose by 0.29 percent in the first half of June, almost twice as quickly as analysts expected.

Yields on the government's benchmark 10 percent bonds due December 2024 fell 2 basis points, or 0.02 percentage point, to 9.41 percent. The bond's price rose 0.17 centavo to 104.92 centavos per peso, according to Banco Santander SA. The bond's yield has surged 115 basis points since May.

``I don't see any relief until markets are more confident about lower inflation expectations,'' said Siobhan Morden, fixed income analyst with ABN Amro Inc. in New York.

To contact the reporter on this story: Hugh Collins in Mexico City at Hcollins8@bloomberg.net

Last Updated: July 8, 2008 17:22 EDT