March 20 (Bloomberg) -- Mexico’s central bank cut its benchmark lending rate more than economists expected as the prospect of a deeper economic slump in Latin America’s second- biggest economy outweighed inflation concerns.

The bank’s board, led by Governor Guillermo Ortiz, cut the overnight rate by three quarters of a point to 6.75 percent, the bank said in a statement. The move surprised all 23 economists surveyed by Bloomberg, none of whom expected a cut bigger than half a point.

Mexico’s dependence on the U.S. economy is undermining exports and the production of goods from electronics to clothing. Industrial output fell 11.1 percent in January from a year earlier, the most since 1995. Exports declined 32 percent to $15.2 billion the same month, while the economy shrank 1.6 percent in the fourth quarter, the worst contraction since 2002.

“The economy is telling the central bank to cut aggressively,” said Rafael de la Fuente, a Latin America economist at BNP Paribas in New York. “The bank could cut rates down to 5.5 percent this year.”

The central bank forecasts that gross domestic product may shrink as much as 1.8 percent this year and Finance Minister Agustin Carstens said on March 4 that the economy faces a “difficult situation” in 2009.

“There is great uncertainty about the depth and duration of the crisis,” the bank said in today’s statement.

Mexico’s peso gained 0.7 percent after the rate decision to 14.1365 per dollar at 12:36 p.m. New York time.

Core Inflation

While forecasting an economic contraction this year, the bank’s February consumer price report showed that the annual core inflation rate, which excludes fresh food and energy, rose to 5.78 percent, the highest since November 2001.

“The sheer deceleration of the economy is going to overwhelm any inflationary trends,” said Pedro Tuesta, a Latin American economist with 4Cast Inc. in Washington. “The economy is much weaker than most people had expected.”

Ortiz, the longest-serving central bank governor in the Americas, has been cutting rates more slowly than his counterparts in the hemisphere.

Chile’s central bank has cut its benchmark rate 600 basis points to 2.25 percent this year, while Brazil has cut its Selic benchmark rate to 11.25 percent from 13.75 percent.

“Markets are rewarding banks that follow pro-growth policies,” said Francisco Diez, director of foreign-exchange trading at RBC Capital Markets in New York. “It’s happening in Chile, it’s happening in Brazil, and now it’s happening in Mexico.”

Peso Outlook

Mexico’s peso may to weaken to 14.5 per dollar by mid-year from a close of 14.24 pesos per dollar yesterday, according to the median forecast of 24 economists surveyed by Bloomberg.

Rogelio Ramirez de la O, the Mexico City-based economist who predicted the country’s 1994 devaluation, forecasts the peso will fall to 18.2 by year-end.

“The tightness of the U.S. and Mexican economies has, unfortunately, made Mexico a major casualty of the current downturn,” said Alberto Bernal, an emerging markets economist at Bulltick Capital Markets in Miami.

To contact the reporter on this story: Bill Faries in Mexico City at wfaries@bloomberg.net

Last Updated: March 20, 2009 13:21 EDT