UPDATE 2-Mexico inflation slows,backing central back rate freeze

Thu Nov 22, 2012 11:38am EST

Related Topics

* Annual inflation slows to 4.36 pct vs estimated 4.31 pct

* Analysts see drop as calming central bank inflation worries

* Jump in 1st half November inflation driven by power rates

By Alexandra Alper and Krista Hughes

MEXICO CITY, Nov 22 (Reuters) - Mexico's annual inflation rate eased again in early November, fueling hopes that price increases have peaked in Latin America's second-biggest economy and underscoring expectations for interest rates to remain on hold.

Inflation in the 12-month period to mid-November slowed to 4.36 percent, a touch above the 4.31 percent median forecast in a Reuters poll of economists, the national statistics agency said on Thursday.

The fall backs the central bank's view that inflation peaked in September at a 2-1/2 year high of 4.77 percent and bolsters expectations for interest rates to remain on hold at the next central bank meeting on Nov. 30 and through next year.

Inflation had been driven higher by fresh food prices but these fell in the first two weeks of November, although a removal of summer electricity subsidies - customary in Mexico with the approach of winter - kept price gains high.

In the first half of November, consumer prices overall rose 0.79 percent, above the 0.72 percent rise forecast in the poll, and nearly double the increase a month earlier.

But Banorte-Ixe economist Gabriel Casillas said a 7 percent rise in electricity prices accounted for 80 percent of the gain and expected annual inflation to end the year at 4.2 percent, approaching the central bank's 4 percent ceiling.

The Banco de Mexico, which has kept interest rates on hold at 4.5 percent since mid-2009, warned on Nov. 7 it could hike rates soon if inflation failed to decline but investors do not expect it to change course until early 2014.

"The central bank has been very clear that as long as the trend to the downside continues they will remain vigilant but rates will remain on hold," said Bank of America-Merrill Lynch economist Carlos Capistran.

"It's only if that trend disappears, if annual inflation starts to pick up again, we have to worry about a possible hike ... I'm not expecting any movement from the central bank."

WELCOME SIGNS

The closely watched core price index, which strips out some volatile food and energy prices, climbed 0.18 percent in the first half of the month, compared with analysts' expectations for a 0.21 percent rise.

Fresh food prices fell 0.33 percent and services prices, a key gauge of home-grown price pressures, were almost flat.

Although non-food core goods inflation, which is the most sensitive to currency fluctuations, picked up slightly in the month, analysts said this was likely due to one-off price hikes leading up to nationwide sales last weekend.

The peso has gained more than 7 percent against the dollar so far this year, one of the biggest advances against the greenback among 152 currencies tracked by Reuters, and this should help limit inflation going forward by capping imported goods prices.

FILED UNDER: