Mexico headline inflation in early January beats expectations, slides below 4%

Jan 23 (Reuters) - Mexico's annual inflation rate slowed to its lowest level in almost four years in the first half of January, official data showed on Thursday, a price level likely to encourage the central bank to keep cutting borrowing costs.

In Latin America's second-largest economy, 12-month headline inflation came in at 3.69% in early January, statistics agency INEGI announced, its lowest since February 2021 and within the central bank's 3% target, plus or minus one percentage point.

Annual inflation was below both the previous month's 4.44% and the 3.78% forecast by economists polled by Reuters.

Slowing consumer price growth was driven by lower non-processed food costs, which helped offset a slightly higher-than-expected reading in the core index, which some consider more reliable as it excludes volatile energy and food prices.

In December, the Mexican central bank - known as Banxico - delivered its fifth interest-rate cut that year, taking its key lending rate to 10.00% with a 25-basis-point reduction while citing progress on inflation.

At the time, the bank's board noted that further and larger cuts could be considered going forward. But some economists see external pressures and an uptick in core prices complicating any push to accelerate monetary easing.

"With the U.S. Federal Reserve set to pause its cutting cycle and uncertainty around tariffs, we think it's more likely that Banxico will deliver another 25bp cut," said Kimberley Sperrfechter, emerging markets economist at Capital Economics.

Mexico is bracing for additional price pressures as U.S. President Donald Trump threatens

tariffs

on its southern neighbor's exports in addition to mass deportations.

Core inflation rose 0.28% in early January, while the annualized core rate came in at 3.72%, exceeding market expectations of 3.68% and the previous month's 3.62%.

Andres Abadia, chief Latin America economist with Pantheon Macroeconomics, stressed concerns over core prices and other factors now facing the central bank.

"Deteriorating external and domestic political conditions, which have pressured the Mexican peso, could constrain policymakers' flexibility if these trends persist," he said.

Banxico is scheduled to announce its next rate decision on Feb. 6. (Reporting by Ricardo Figueroa and Natalia Siniawski; Writing by Gabriel Araujo; Editing by David Alire Garcia and Andrea Ricci)