EMERGING MARKETS-Latin America mixed as Mexico readies for rate decision, South Africa on hold

By Pranav Kashyap and Niket Nishant

March 26 (Reuters) - Most Latin American currencies remained on the backfoot on Thursday as markets digested an interest rate cut in Mexico, a hold in South Africa and the latest developments in the Middle East conflict.

Mexican stocks .MXX fell 1.5%, while the local peso MXN= slipped 1%. The Bank of Mexico cut its benchmark interest rate by 25 basis points.

"Even though Mexico's government revenues are mostly protected from a sharp drop in oil prices through hedging, the country is exposed to a major price jump," Alfredo Coutino, director for Latin America at Moody's Analytics, said this week.

The oil shock could, Coutino added, therefore have "a direct impact on the trade balance, inflation, and an indirect impact on the economy through the U.S."

Broader gauges tracking Latin American equities .MILA00000PUS and currencies .MILA00000CUS were down 2% and 0.8%, respectively,

In South Africa, the rand ZAR= weakened 1.3% against the dollar, while stocks .JTOPI declined after the central bank kept its key policy rate on hold at 6.75%.

Policymakers warned that South Africa's headline inflation could accelerate to around 4%, with fuel inflation expected to surge by more than 18% in the second quarter.

As a net fuel importer, South Africa is heavily exposed to the spike in global energy prices triggered by the Iran war.

A U.S. proposal for ending nearly four weeks of fighting is "one-sided and unfair", a senior Iranian official told Reuters on Thursday, while also stressing that diplomacy had not ended.

The Chilean peso CLP= slipped 1.5%, while equities .SPIPSA were flat. Investors were digesting fuel price rises as the government moved to confront mounting oil costs.

"Risks are tilted in a more hawkish direction. The government's mitigating measures will limit the social impact of higher fuel prices but do little to alter the inflation dynamics relevant for monetary policy," said Andres Abadia, chief LatAm economist at Pantheon Macroeconomics.

Governments across the emerging market universe have been working to try to shield their economies from the fallout of a war that has now been going on for nearly a month.

With the crucial Strait of Hormuz shut, oil prices have swung wildly, shaking markets and forcing a dramatic rethink among emerging-market central banks.

At the start of the year, some policymakers - including those in Hungary and Brazil - were preparing to cut interest rates. Now, as inflation risks gather momentum, they are being pushed to consider whether the next move should be a hike.

Brazil's real BRL= dipped 0.5%. Inflation rose more than expected in the month to mid-March, although the pace eased from the sharp jump seen a month earlier. The Brazilian benchmark stock index slipped 1.5%.

Elsewhere, Peruvian equities .MXNUAMPESCPGPE dropped 1.3%.