UPDATE 3-Mexico annual inflation slowest in nearly 5 years

* Annual rate 3.04 pct lowest since 3 pct in May ’06

* Core inflation rose 0.30 pct; poll saw up 0.39 pct

* Headline March inflation up 0.19 pct; poll saw 0.29 pct
(Adds Internet link to central bank inflation statement)

By Patrick Rucker

MEXICO CITY, April 7 (Reuters) – Mexico’s annual inflation
rate slowed more than expected in March to its lowest level in
nearly five years, giving the central bank ample room to keep
borrowing costs on hold while the economy strengthens.

Consumer prices rose 3.0 percent in the year (MXCPIA=ECI: Quote, Profile, Research)
through March, striking the target set by the central bank,
slowing down from 3.6 percent a month earlier, the central bank
said on Thursday.

Analysts polled by Reuters had expected an annual reading
of 3.2 percent. The annual figure has been below expectations
every month this year and the 12-month inflation rate has not
been this low since May 2006.

A fall in prices of fresh produce like tomatoes, onions and
limes, staples in Mexican kitchens, plus a decline in the cost
of services like mobile phones, helped slow inflation to only a
0.2 percent rise in the month of March, the central bank said.

That helped offset a nearly 4 percent rise in tortillas,
the corn patty that is a cornerstone of the Mexican diet.

While Mexico’s economy is recovering, it still has not
fully bounced back from a punishing downturn in 2009 which is
helping keep a lid on prices, allowing the central bank to hold
its benchmark lending rate of 4.5 percent in place since July
2009.

Severe weather has stoked policymakers concern about higher
food costs but those worries seem to have subsided.

“I don’t see why the central bank will move (to raise
rates) before January 2012,” said Alberto Bernal, head of
research at Bulltick Capital Markets in Miami, commenting on
the inflation data.

“Mexico just does not have an inflation problem since there
is still an output gap,” he added, referring to slack in
economic capacity.

After the release of the inflation data, investors pushed
down yields on interest rate swaps as they cut bets on the size
of possible rate hikes in coming months. The yield on Mexico’s
one-year TIIE interest rate swap (MXNIRS1Y=RR: Quote, Profile, Research) bid down 3 basis
points.

Mexico’s central bank is the odd man out of counterparts
in South America, like Brazil, Chile, Colombia and Peru, all
which have raised their benchmark interest rates repeatedly
this year to tame faster inflation.

Brazil Thursday reported higher than expected inflation
for March of 0.79 percent, taking its 12-month inflation rate
to 6.3 percent, just shy of 6.5 percent ceiling of the its
central bank’s target range for this year. [ID:nN07268340].

‘NO BETTER COMBINATION’

Mexico’s strengthening economy appears to be putting only
slight pressure on prices in what central bank chief Agustin
Carstens said was an enviable position.

“For a central bank there is no better combination… than
an accelerating growth rate and lower inflation,” he said
during a presentation to lawmakers. [ID: nN06202736]

The economy should expand by nearly 5 percent this year and
inflation is a downward path towards the central bank’s 3
percent target, Carstens said.

Mexico’s economy grew 5.5 percent in 2010 as it recovered
from a steep recession into which it plunged in 2008.

The median expectation of analysts polled by Reuters is for
central bank rates to stay on hold until early 2012. Analysts’
inflation expectations for the year fell slightly in a central
bank poll released last week. [ID:nN01233599]

STATISTICAL QUIRK

Also contributing to the mild annual inflation figures was
a statistical quirk as annual inflation rates this year have
been slowing as an early 2010 tax hike falls off the 12-month
reading.

Consumer prices (MXINFL=ECI: Quote, Profile, Research) rose 0.19 percent in March
after rising 0.38 percent in February, according to
non-seasonally adjusted figures. The median forecast in a
Reuters poll was for a 0.29 percent gain.

The core index, which strips out some volatile food and
energy prices, rose 0.30 percent during the month after
climbing 0.40 percent in February (MXCPIX=ECI: Quote, Profile, Research). The median
forecast in a Reuters poll was for a 0.39 percent increase.

For the central bank statement on March inflation, please
go to:
http://www.banxico.org.mx/informacion-para-la-prensa/comunicados/inflacion/mensual/{20436495-878C-0337-FEE7-5A6AD6FB9207}.pdf
( Additional reporting by Luis Rojas Mena; Editing by W Simon

UPDATE 3-Mexico annual inflation slowest in nearly 5 years