By Michael O'Boyle
MEXICO CITY, Oct 24 (Reuters) - Mexico's annual inflation rate eased in the first half of October to its slowest pace since early this year, giving policymakers room to keep cutting interest rates to counter an economic slowdown.
Inflation in the 12 months to mid-October slowed to 3.27 percent from 3.46 percent in the first half of September, the country's national statistics agency said on Thursday.
The data marked the fourth month in a row inflation remained below the central bank's 4 percent annual target ceiling. It was the slowest reading since mid-January.
Most analysts expect Mexico's central bank to cut its benchmark interest rate by 25 basis points this Friday to 3.50 percent and the data backed that view.
A minority expect a bigger half-percentage point cut or a cycle of at least two more cuts. Yields on Mexican interest rate swaps rose after the data, which was higher than some had 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," said Salvador Orozco, a strategist at Santander in Mexico City.
Tame inflation and an economic contraction in the second quarter prompted Mexico's central bank to unexpectedly cut its benchmark interest rate in September. Massive flooding across the nation last month has further hurt economic growth.
Consumer prices rose 0.40 percent in the first half of October, below expectations for a 0.42 percent rise and up from a 0.34 percent increase in early September.
Core consumer prices, which strip out some volatile food and energy prices, climbed 0.14 percent compared to forecasts for a rise of 0.13 percent and up from a 0.30 percent advance in the first half of September.
In a separate report on Thursday, data showed the pace of expansion in Mexico's economy slowed in August as the service sector grew at a less robust pace than the prior month.
Mexico's monthly economic activity index rose by 0.22 percent in August compared with July and adjusted for seasonal variations, slowing from July's upwardly revised 0.57 percent expansion, the national statistics agency said.
On an annual basis, economic activity rose 0.84 percent in the 12 months through August, down from the upwardly revised 1.87 percent annual expansion in July.
In late August, the government slashed its growth outlook for 2013 to 1.8 percent from a prior outlook for 3.1 percent after the contraction in the second quarter. Storm damage last month could shave off an additional 0.1 percentage point, the finance ministry has said.