By Carla Mozee

Mexican stocks finished slightly higher Friday after the country's central bank cut its key interest rate in line with expectations and signaled that its rate-easing campaign is nearing an end.

The IPC equity index eked out a gain of 6.4 points to 25,741.96. The advance was enough to stretch the benchmark's run of wins to eight and post a weekly rise of 8.8%. The weekly gain was the biggest since the week ended May 10.

On Friday, shares of interest-rate sensitive banks were mixed, with Grupo Financiero Banorte up 1.9%, Grupo Financiero Inbursa down 1.7% and microlender Compartamos down 0.8%.

Shares of America Movil (AMX), which have the heaviest weighting on the equity index, dropped 1.9% and shares of fixed-line operator Telefonos de Mexico (TMX) fell 0.9%.

Home building stocks, however, were higher, led by a 2.5% rise in shares of Homex (HXM).

Rates on hold?

The Bank of Mexico reduced the benchmark interest rate by 25 basis points to 4.5%, in line with expectations of analysts polled by Dow Jones Newswires. It was the seventh rate cut this year.

The size of July's cut was smaller than the cut of 50 basis points delivered in June as inflation remains above the bank's target. Policymakers also indicated that it is likely that they will hold the key rate steady in the coming months.

"Inflation convergence is the key variable," wrote Flavia Cattan-Naslausky, a currency strategist at RBS Securities in a note Friday. "Expect a pause over the next 4-6 months at the minimum."

Should inflation converge to 4% or below by the fourth quarter and Mexico's currency is stable, "Banxico could cut rates below the 4.50% level to further boost domestic growth," said the analyst.

The bank backed its forecast for inflation to reach about 4% by year's end. It also expects inflation to near its target of 3% by the end of 2010.

Annual inflation in June fell to 5.74% from the year-ago period, down from 5.98% in May. Prices excluding food and energy costs fell to 5.39% in June from 5.56% in the same period a year ago.

Policymakers have attempted to address their worries about inflation alongside a sharp economic contraction. Mexican economic activity has been struggling as its largest trading partner, the U.S., wrestles with its own recession. A deadly outbreak earlier this year of swine flu has put additional pressure on Latin America's second-largest economy.

Economists polled by Mexico's central bank currently expect a contraction of 6.3% in 2009.

The central bank also said Friday that it expects to see recovery starting in the second half of the year. The currency jumped 1.6%, fetching 13.327 pesos per U.S. dollar.

Win Thin, senior currency strategist at Brown Brothers Harriman & Co, said in a note that in its view, "the Mexican economy remains in a sorry state, and further [rate] easing is warranted."

The peso also found support from a better-than-anticipated rise in U.S. housing starts in June, another signal that the country's housing slump may be leveling out.

"The peso may get a short-term boost from the shift in interest rate expectations, but when the dust settles, there's not much to get excited about in Mexico," said Thin, who said it would "use this recent peso rally to re-establish long dollar positions."

He noted that the peso is up less than 2% on a year-to-date basis against the greenback.

Elsewhere, Brazil's Bovespa index rose 0.3% to 52,072.49, its third straight session for gains. The index finished up 5.8% for the week, its biggest gain since early May.

Shares of oil giant Petrobras (PBR) rose 1.8% and Vale (RIO) picked up 0.3%.

The miner said it's focusing on organic growth of its fertilizer business, and has not issued an offer to purchase fertilizer assets. On Thursday, local newspaper Estado de S. Paulo said Vale was considering a $25 million bid to acquire fertilizer producer Mosaic Co. (MOS).

Argentina's Merval reversed course and lost 0.3% to close at 1,623.43 on Friday. It surged 9.9% on a weekly basis, the biggest percentage increase since the week ended May 8.

Chile's IPSA on Friday shed 2 points to 3,207.80, and finished the holiday-shortened week up 4.1%.