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By Noe Torres
MEXICO CITY, May 21 (Reuters) - Mexico's central bank slashed its 2014 growth forecast on Wednesday after a sluggish first quarter in Latin America's second biggest economy, but policymakers said a recovery is gaining steam.
In a quarterly inflation report, the central bank cut its outlook for growth in 2014 to between 2.3 percent and 3.3 percent from a previous estimate of 3 percent to 4 percent.
The central bank also said inflation could rise above 4 percent in the second half of this year but saw it easing below that level before the end of 2014.
Central Bank Governor Agustin Carstens said he saw signs of a pickup in economic activity and an important recovery in the second quarter.
"The most significant part of the deceleration possibly already happened and what we should expect going forward is more vigorous growth," Carstens said.
Industrial production was sluggish while retail sales and consumer confidence fell in early 2014, but recent data is pointing to stronger exports and domestic demand, Carstens said.
Mexico's central bank held its main interest rate steady last month at 3.5 percent as easing inflation gives policymakers room to leave borrowing costs low to support the economy.
The annual rate of inflation has been slowing after a spike above the central bank's 4 percent limit early this year due mostly to new taxes on soft drinks and junk food.
Mexican inflation data due on Thursday is expected to show price pressures eased in early May, backing expectations that policymakers will leave interest rates on hold this year at a record low to support a struggling economy.
Despite weakness in the economy, Mexico's central bank is not seen lowering borrowing costs since a cut lower in interest rates could undermine the peso currency and spur higher inflation by making imports more expensive.
Mexico's economy is closely tied to the United States, where policymakers have begun to draw back on monetary stimulus that had supported demand for higher yielding emerging market assets.
Mexico's peso hit a five-month high last week, backed by bets of a slow withdrawal of U.S. monetary stimulus. (Reporting by Michael O'Boyle, Alexandra Alper, and Luis Rojas; Editing by Dave Graham and Cynthia Osterman)