Wednesday June 24, 05:34 PM
UPDATE 2-Mexico inflation falls to lowest since early Oct
By Robert Campbell
MEXICO CITY, June 24 (Reuters) - Mexican consumer price inflation slowed to its lowest annualized rate since early October as reductions in the cost of electricity brought down the overall pace of price increases.
Inflation stood at 5.74 percent in the first half of June, down from 5.98 percent at the end of May, but still well above the central bank's target of 3 percent.
Mexico's central bank has been slashing interest rates to prop up the flagging economy amid expectations that the country's deep recession and the stabilization of the exchange rate would lower inflation.
'The balance of risk is tilting heavily in the direction of very weak growth and away from inflation,' Goldman Sachs (NYSE: GS - news) economist Alfredo Ramos wrote in a note to clients.
'We do not subscribe to the stagflation thesis in Mexico where the severe contraction in gross domestic product would coexist with high inflation readings,' he added.
The central bank cut its benchmark interest rates by 50 basis points last week to 4.75 percent, but signaled that its easing cycle is nearly over.
Many analysts expect the bank to make at most one more cut of 25 basis points before holding rates steady until the economy begins to recover.
However, Ramos also suggested ongoing economic weakness could prompt the bank to push rates down to as low as 4 percent in three 25 basis point steps.
The country's economy contracted 8.2 percent in the first quarter of 2009 compared with the year-ago quarter, slammed by plunging demand from the United States for Mexico's exports. Economists surveyed by the central bank on average expect the economy to contract by 5.8 percent this year.
Mexican officials have said the local economy will not recover until the U.S.-focused export sector starts firing on all cylinders again.
The sharp fall in the value of the pesoagainst the U.S. dollar that began in the final months of 2008 pushed up inflation by raising the cost of imported goods.
The currency plunged below 15 to the dollar earlier this year but stabilized around 13.30 after Mexico arranged a line of credit with the International Monetary Fund and activated a dollar swap line with the U.S. Federal Reserve, effectively doubling its dollar reserves.
Consumer prices rose 0.13 percent in the first half of June . Analysts in a Reuters poll, on average, were expecting an increase of 0.14 percent in prices during early June.
The closely watched core consumer price index, which strips out some volatile food and energy prices, rose 0.15 percent during the first two weeks of the month.
((Reporting by Robert Campbell; editing by Gary Crosse)) Keywords: MEXICO ECONOMY/
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