Mexico inflation slows in March, market anticipates rate cuts

By Sharay Angulo

MEXICO CITY (Reuters) - Mexico's annual inflation continued to slow in the first half of March, the statistics institute said on Friday, raising expectations the nation's central bank will loosen monetary policy later in the year.

Mexican consumer prices rose 3.95 percent in the year through February, slightly below the 3.99 percent increase registered in the second half of February.

Inflation was in line with estimates from a Reuters survey, in which the median forecast of 13 specialists predicted an increase of 3.96 percent.

Fitch Ratings this week said it believed Mexico's cycle of raising rates was over for now. The central bank will announce its next decision on interest rates on Thursday. The bank held the benchmark lending rate at 8.25 in February after a series of hikes.

Central Bank Governor Alejandro Diaz de Leon said at a banking convention on Friday that it would be important for the entity to consider not only cyclical factors in its decisions on rates, but also other risks including shocks and structural factors.

Diaz de Leon has called for maintaining the central bank's independence as key to the economic health in Mexico, where President Andres Manuel Lopez Obrador took office in December.

He also has advocated for keeping the central bank's focus on inflation. In an interview on Thursday, he noted that Lopez Obrador's decision in late October to cancel a partly-built new Mexico City airport had fanned market volatility in Mexico, as well as concern over the financial health of state oil firm Pemex. [nL1N219025]

Responding to the inflation data, Capital Economics said it expected the headline rate would decline during the second half of the year, paving the way for monetary loosening.

"We expect 75bp of interest rate cuts this year, which is more than markets are currently pricing in," Capital Economics said in a note.

Core inflation, which strips out some volatile food and energy prices, rose 3.51 percent in the year through the first half of the month.

Consumer prices rose 0.26 percent in the first half of March compared with the previous month.

The data showed that prices for gasoline, lemons and tomatoes rose. Declines in prices for foodstuffs such as potatoes and eggs helped lower prices overall.

Last month, Mexico's central bank held its benchmark interest rate steady at 8.25 percent, its highest level in more than a decade.

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This week, the U.S. Federal Reserve said it does not anticipate rate hikes in 2019, easing pressure on the Mexican central bank to raise the benchmark interest rate in its decision on monetary policy next Thursday.