January 24, 2013 / 5:45 PM / 5 years ago

UPDATE 3-Mexico: Markets bet on rate cut as inflation falls

* 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) - Annual inflation in Mexico eased to the lowest level in more than a year in early January, nearing the central bank’s target and bolstering market 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, the lowest mark since October 2011 and well below the 3.57 percent rate at 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.

Yields on interest rate swaps were bid lower after the data as some investors increased bets on an interest rate cut this year. Mexico’s two-year interest rate swap bid down 3 basis points, on track to close at its lowest level since last July, when a spike in 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?” asked 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.”

Analysts said growth in Mexico would need to slump to spur lower borrowing rates. Economic growth is seen slowing from a 3.9 percent in 2012 to 3.5 percent this year, according to a Reuters poll published this week.

“We maintain our view that Banxico will remain on hold for an extended period of time,” Banorte analysts said in a note.

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.

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 previous month.

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