UPDATE 3-Mexico inflation slows in mid-March; rate cuts eyed

(Adds jobless data, reaction in interest rate futures)

By Jason Lange

MEXICO CITY, March 24 (Reuters) - Mexico's inflation rate slowed in early March as electricity costs fell, possibly giving the central bank more room to cut interest rates in order to boost the flagging economy.

Consumer prices rose 5.98 percent in the 12 months through March 15, more than analysts had expected but still down from 6.25 percent in the year through mid-February, the central bank said on Tuesday.

The early-March price reading confirms that the worst of Mexico's inflation problems are probably behind, analysts said.

Mexico's central bank has been lowering borrowing costs since January to help the economy, and the inflation data was seen as making further cuts more likely.

"Although inflation was a little higher than expected, the fact that it's below 6 percent helps a little ... and confirms that inflation is trending downward," said Manuel Galvan, an analyst at MetAnalisis consultancy in Mexico City.

The mid-March figure was the first reading below 6 percent since October.

Yields on interest rate futures fell, meaning investors put more money on bets that interest rates would fall. The yield on the December TIIE contract TIIZ9 fell 10 basis points to 6.14 percent.

Mexican President Felipe Calderon made sweeping reductions to energy prices in January, including electricity rates, to shield households and businesses from the global economic slowdown.

Inflation soared across Latin America last year as growing Asian economies pushed up prices for commodities like grains.

Core consumer prices, which strip out some volatile elements such as food and energy and have been closely watched for signs that Mexico's weak currency is fueling inflation, also fell.

The central bank lowered its key interest rate by 75 basis points to 6.75 percent last Friday, saying risks had increased substantially more for economic growth than for inflation, with Central Bank Gov. Guillermo Ortiz saying that the future direction of monetary policy was clear.

RECESSION EYED

A big fall in the peso's value since August has helped to keep inflation near seven-year highs, but Mexico's exports have collapsed due to the U.S. recession, putting hundreds of thousands of people out of work.

Mexico's unemployment rate spiked in February to 5.3 percent. Mexico has changed the way it measures joblessness several times over the last decade, but February's reading was the highest of any measure since 1996 when the country was in the throes of a financial meltdown known as the Tequila Crisis.

The current global crisis is seen pushing Mexico into its deepest recession since the economy contracted 6.2 percent in 1995.

Some analysts said the report showed that the economic slowdown was pushing down inflation, strengthening expectations of more interest rate cuts by the central bank.

"The focus is on growth, not in current inflation," consultancy 4Cast said in a report.

Mexico's benchmark 10-year peso bond MX10YT=RR gained on the report, rising 0.689 a point in price to push its yield down 10 basis points to 7.76 percent.

The 12-month reading for core prices was 5.72 percent in mid-March, down from 5.81 percent in mid-February.

Headline prices rose 0.31 percent in the first half of March MXCPIF=ECI. Analysts polled by Reuters expected them to rise 0.25 percent.

The core consumer price index MXCPIH=ECI rose 0.29 percent during the first two weeks of the month, while analysts had expected a 0.29 percent increase. (Additional reporting by Lorena Segura and Luis Rojas Mena; Editing by Leslie Adler)