By Michael O'Boyle
MEXICO CITY, Oct 24 (Reuters) - Mexico's annual inflationrate eased in the first half of October to its slowest pacesince early this year, giving policymakers room to keep cuttinginterest rates to counter an economic slowdown.
Inflation in the 12 months to mid-October slowed to 3.27percent from 3.46 percent in the first half of September, thecountry's national statistics agency said on Thursday.
The data marked the fourth month in a row inflation remainedbelow the central bank's 4 percent annual target ceiling. It wasthe slowest reading since mid-January.
Most analysts expect Mexico's central bank to cut itsbenchmark interest rate by 25 basis points this Friday to 3.50percent and the data backed that view.
A minority expect a bigger half-percentage point cut or acycle of at least two more cuts. Yields on Mexican interest rateswaps rose after the data, which was higher than somehad expected, as investors dialed back those bets.
"We will need to see what the central bank says tomorrow,whether it leaves the door open to another cut or not," saidSalvador Orozco, a strategist at Santander in Mexico City.
Tame inflation and an economic contraction in the secondquarter prompted Mexico's central bank to unexpectedly cut itsbenchmark interest rate in September. Massive flooding acrossthe nation last month has further hurt economic growth.
Consumer prices rose 0.40 percent in the firsthalf of October, below expectations for a 0.42 percent rise andup from a 0.34 percent increase in early September.
Core consumer prices, which strip out somevolatile food and energy prices, climbed 0.14 percent comparedto forecasts for a rise of 0.13 percent and up from a 0.30percent advance in the first half of September.
In a separate report on Thursday, data showed the pace ofexpansion in Mexico's economy slowed in August as the servicesector grew at a less robust pace than the prior month.
Mexico's monthly economic activity index roseby 0.22 percent in August compared with July and adjusted forseasonal variations, slowing from July's upwardly revised 0.57percent expansion, the national statistics agency said.
On an annual basis, economic activity rose 0.84percent in the 12 months through August, down from the upwardlyrevised 1.87 percent annual expansion in July.
In late August, the government slashed its growth outlookfor 2013 to 1.8 percent from a prior outlook for 3.1 percentafter the contraction in the second quarter. Storm damage lastmonth could shave off an additional 0.1 percentage point, thefinance ministry has said.
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