UPDATE 3-Mexico inflation picks up but bets on rate cuts remain

Fri Feb 22, 2013 12:57pm EST

Related Topics

* Inflation accelerates to 3.47 percent in year to mid-February

* Unemployment rises to highest in over a year

* Central bank chief says still might cut interest rates

By Alexandra Alper and Michael O'Boyle

MEXICO CITY, Feb 22 (Reuters) - Mexico's inflation accelerated more than expected in early February, but the blip higher is unlikely to worry the central bank as it argues a steady downtrend in consumer prices may justify lower borrowing costs.

Annual inflation picked up to 3.47 percent in the first half of February, the national statistics agency said on Friday, above expectations for a rise to 3.4 percent in a Reuters poll and a 3.21 percent rate notched in the first half of January.

The rise in the annual rate was the first uptick at the start of a month since September, when inflation in Latin America's No. 2 economy hit a 2-1/2-year high.

But cooling price gains since then and risks to growth prompted the central bank to hint in January that it could cut rates from the current 4.5 percent if inflation keeps easing.

Policymakers have said they expected inflation to rise in early 2013 due to low inflation rates early last year, but to end the year close to 3 percent - the central bank's target.

Speaking at an event in Mexico City after the data was released, Mexican central bank chief Agustin Carstens noted that inflation has been steadily heading toward 3 percent during the last decade, while growth is now slowing.

"If that environment is consolidated, and given that inflation expectations are favorable, a reduction in the benchmark interest rate could be in line with the convergence of inflation towards its permanent goal of 3 percent," he said, according to a presentation posted on the bank's website.

Friday's data first pushed investors to trim bets that the Banco de Mexico could cut rates in the coming months, but Carstens' comments drove yields on interest rate swaps lower.

Early February's inflation was "slightly above what we expected that doesn't change our thinking about the central bank," said Mario Copca, an analyst at CI Banco in Mexico City, who says there is still margin for a rate cut.

"We are not seeing that this could generate sustained inflation pressures."

The market is eyeing slightly more than even odds for a 25-basis-point cut in March, while a cut of that magnitude is fully priced in for April and investors are tilting toward bets of at least 50 basis points in cuts this year.

PHONE PRICE PRESSURE

Mexico's inflation trend contrasts with Brazil's where annual inflation ticked up to 6.18 percent in early February and analysts are expecting higher rates.

Consumer prices rose 0.24 percent in the first half of February, above the 0.15 percent notched in the first half of January and the 0.17 percent rise analysts had forecast.

Core prices, which strip out volatile goods like energy and food, also rose 0.24 percent, above the 0.18 percent in the first half of January and compared to an expected 0.22 percent.

The acceleration was driven by increases in mobile phone tariffs, which fell sharply at the end of last year, and a rebound in fresh food prices, up 0.94 percent in the half-month on rises in the cost of green tomatoes and onions.

Annual inflation in services, a key gauge of home-grown price pressures, accelerated to 2.16 percent but non-food core goods inflation, the most sensitive to currency fluctuations, eased.

Separate data showed Mexico's jobless rate rose in January to its highest since September 2011, raising concerns of a dip in consumer spending, which fuels economic growth.

The seasonally adjusted unemployment rate rose to 5.27 percent last month, the national statistics agency said, above expectations for a 4.9 percent rate and an upwardly revised 5.02 percent rate in December.

Unemployment has fallen back from rates near 6 percent seen during a deep recession in 2009, but had crept up in recent months as the global slowdown weighed.

The headline unadjusted jobless rate was 5.42 percent in January, above an expected 4.97 percent and the 4.47 percent in December.

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