CORRECTED-UPDATE 2-Mexico inflation slowdown fans interest rate cut bets

Thu Jan 24, 2013 11:25am EST

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* Annual inflation lowest since October 2011

* Markets move to price in 25 basis point rate cut

* Economic activity rebounds more than expected

MEXICO CITY, Jan 24 (Reuters) - Mexican annual inflation eased to its lowest in more than a year in early January, nearing the central bank target and bolstering bets on an interest rate cut this year.

Annual inflation slowed more than expected to 3.21 percent in the first half of January, the national statistics agency said on Thursday, its lowest since October 2011 and well below the 3.57 percent rate notched by the end of December.

Falling inflation in Latin America's no. 2 economy contrasts with a spike above 6 percent in Brazil and, along with risks to growth, prompted the central bank to hint at its January meeting it might cut rates from the current 4.5 percent.

Traders firmed bets on a 25 basis point reduction this year after the data, with yields on Mexico's two-year interest rate swap bid down as much as 7 basis points at 4.66 percent, its lowest since last July, when a spike in inflation on food costs drove bets of a rate hike.

Still, analysts were skeptical of a move by the central bank, which targets inflation of 3 percent, given rates have been on hold since mid-2009 and policymakers have failed to follow up on hints before.

"The market is now pricing in a cut, but what is going to be the final criteria to push the central bank to action?," said Siobhan Morden, an analyst at Jefferies & Co.

"The market has had these manic shifts from hikes to cuts, but the central bank has been consistent in inaction."

FOOD PRICES FALLING

Inflation for the 12 months to mid-January of 3.21 percent was lower than the 3.37 percent forecast by analysts in a Reuters poll, curbed by a lower-than-expected rise in prices early this month.

Consumer prices rose just 0.15 percent in the first half of January, well below the 0.27 percent notched in the first half of December and the 0.31 percent rise analysts had forecast in a Reuters poll.

Core prices, which strip out volatile goods like energy and food, rose 0.18 percent, in the first half of January, below the 0.26 percent in the first half of December and compared to an expected 0.23 percent.

Fresh food prices, which drove inflation to a 2-1/2 year high in 2012, fell 2.21 percent in the half-month, dragged down by a fall in the price of tomatoes and chilies.

Annual inflation in services, a key gauge of home-grown price pressures, accelerated slightly to 1.30 percent and non-food core goods inflation, the most sensitive to currency fluctuations, eased to 3.87 percent.

The Banco de Mexico is also concerned about weaker growth. Analysts polled by Reuters expect growth to slow to 3.5 percent this year, from an expected 3.9 percent in 2012, amid a weak global environment and before promised reforms by Mexico's new government have time to kick in.

Separate data showed annual economic activity grew 4.14 percent in the 12 months through November, beating expectations for 3.30 percent growth in a Reuters poll but below the upwardly revised 4.49 percent annual growth in October.

On a monthly basis, economic activity expanded by 1.07 percent in November, above forecasts for 0.55 percent growth and better than the upwardly-revised expansion of 0.36 percent the prior month. (Reporting by Krista Hughes and Michael O'Boyle Editing by W Simon)

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