Mexico inflation fall in early July reignites rate cut expectations

By Aida Pelaez-Fernandez

MEXICO CITY (Reuters) -Mexico's headline inflation slowed in the first half of July, falling back within the central bank's target range and fueling expectations that the bank will continue to cut interest rates in Latin America's second-largest economy.

Consumer prices rose 3.55% in the 12 months through mid-July, data from the national statistics agency showed on Thursday, slowing down from the 4.51% reported a month earlier.

The figure also undershot the 3.64% expected by economists polled by Reuters.

The slowdown in inflation "shows that the Bank of Mexico has room to keep cutting interest rates," President Claudia Sheinbaum said at her regular morning press conference.

The Bank of Mexico, which targets an inflation rate of 3% plus or minus one percentage point, lowered its benchmark interest rate by 50 basis points in June - its third straight cut of that magnitude - bringing it to 8.5%, the lowest since August 2022.

In the first half of July alone, Mexican consumer prices rose 0.15% compared to the prior two weeks, also below expectations of a 0.27% increase.

Analysts at brokerage Monex said the data was a surprise as inflation in the first half of July reached its lowest level for this period in a decade, but emphasized challenges on core inflation.

The closely watched core price index, which strips out some volatile food and energy prices, climbed 0.15% in early July, compared with 0.22% a month earlier. The 12-month core rate came in at 4.25%.

"Given the stubbornness of core inflation, we expect Banxico to reduce the scale of its cuts: for the August 7 meeting, we estimate that it will cut the benchmark interest rate by 25 basis points to 7.75%," Monex analysts added.

(Reporting by Aida Pelaez-Fernandez and Ricardo Figueroa; Additional reporting by Ana Isabel Martinez; Editing by Gabriel Araujo and Emelia Sithole-Matarise)

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