UPDATE 2-Mexico annual inflation eases for 2nd straight month

Fri Dec 7, 2012 10:36am EST

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* November inflation 4.18 percent; poll 4.34 percent

* Backs forecast for no interest rate change

By Alexandra Alper and Krista Hughes

MEXICO CITY, Dec 7 (Reuters) - Mexico's annual inflation eased for the second month running in November, further diminishing chances of the central bank raising interest rates soon.

Mexican consumer prices rose 4.18 percent in the year through November, down from 4.6 percent in October and below expectations in a Reuters poll for 4.34 percent, the national statistics agency said on Friday.

Consumer prices rose 0.68 percent last month, above the 0.51 percent rate notched in October but below the 0.83 percent expected in a Reuters poll.

Although inflation has been above the central bank's 4 percent ceiling for six months, a welcome retreat from a 2-1/2 year peak in September has prompted the Banco de Mexico (Banxico) to row back on threats to raise interest rates "soon." November's inflation rate was the lowest since May.

"Clearly inflation reached a peak and is going down," said Benito Berber, an economist at Nomura in New York. "There is very little probability that Banxico regains its hawkish tone in the near future."

Last week the Banco de Mexico said it expected inflation to end the year below 4 percent, and investors and economists believe interest rates will be held at 4.5 percent until mid-2014.

Inflation had been pushed upward by fresh food prices as the cost of eggs and chicken rose following an outbreak of avian flu in western Mexico and bad weather damaged crops.

But data showed a 2.04 percent drop in fruit and vegetable prices in November, the second monthly fall in a row, which helped ease the headline rate, although the removal of summer electricity subsidies continued to weigh.

"The central bank is likely to draw comfort from the lack of evidence of second-round effects from the recent large domestic and external supply shocks to food prices," Goldman Sachs economist Alberto Ramos said in a client note.

The core price index, which strips out some volatile food and energy prices, rose 0.05 percent in November, compared with an expected 0.26 percent and a 0.23 percent rise in October.

Annual inflation in services, a key gauge of home-grown price pressures, decelerated to 1.7 percent and non-food core goods inflation, the most sensitive to currency fluctuations, picked up to 4.1 percent.

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