UPDATE 2-Mexico annual inflation eases to four-month low in June

Tue Jul 9, 2013 1:02pm EDT

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* Lower fresh food prices cool headline rate

* Backs central bank forecast price spike would cool

By Alexandra Alper

MEXICO CITY, July 9 (Reuters) - Mexico's annual inflation rate slowed more than expected to a four-month low in June, backing central bank forecasts that a recent spike would soon ease, but analysts held to expectations that policymakers would not cut interest rates.

Inflation in the 12 months through June totaled 4.09 percent, the national statistics agency said on Tuesday, below analysts' expectations for a 4.22 percent reading and down from 4.63 percent in the twelve months through May.

Despite the dip, inflation has been above the central bank's 4 percent target ceiling for four consecutive months.

Yields on Mexican interest rate swaps fell after the data was released as investors pared bets on a rate hike in the next year. But analysts said it was unlikely the central bank could move to lower borrowing costs anytime soon.

"I don't think they are going to be proactive in that sense unless you have the manufacturing sector pulling down production heavily," said Enrique Alvarez a strategist at IDEAglobal in New York. "That's not in the cards right now."

A surprise interest rate cut in March to a historic low of 4 percent had spurred expectations of further cuts earlier this year. However, the spike in inflation and a slump in the peso currency pushed the market to abandon bets of lower benchmark rates.

Mexico's peso has weakened around 8 percent since May on concerns the U.S. Federal Reserve could soon begin to cut back on its stimulus, casting aside policymakers' worries that the peso was becoming too strong.

Policymakers are confident price pressures will ease further in the second half, partly due to weaker growth in Mexico, Latin America's second-biggest economy.

Disappointing growth in the first quarter prompted the Finance Ministry to revise its growth forecast for the year down to 3.1 percent from 3.5 percent. Growth in 2012 was 3.9 percent.

Consumer prices fell 0.06 percent in June as some fresh food prices fell sharply after a recent surge, while the core price index, which strips out some volatile food and energy prices, rose 0.13 percent.

But Alvarez said the slower pace in price gains was not yet a trend, adding that the central bank would want to "wait and see" about uncertainty in the peso and the global economic environment before moving on rates.

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