February 8, 2018 / 2:50 PM / a year ago

Mexico January inflation cools less than expected from 16-1/2 year high

MEXICO CITY (Reuters) - Mexican consumer prices cooled less than expected in January from a recent 16-1/2 year high, data showed Thursday, backing bets that the central bank will hike interest rates to contain worries inflation may not fade as forecast.

Consumer prices rose 5.55 percent MXCPIA=ECI in the year through January, the national statistics agency said. That was down from 6.77 percent in December, but above expectations of 5.51 percent in a Reuters poll.

The lower inflation reading is largely due to a statistical adjustment a year after Mexico raised fuel prices, and analysts still expect the Banco de Mexico to raise its benchmark interest rate by 25 basis points to 7.50 percent later on Thursday.

Goldman Sachs economist Alberto Ramos said a rate hike would likely come “given recent hawkish Banxico-speak, still high well above-target inflation, further deterioration of inflation expectations and lingering potentially very consequential external and domestic risks.”

Policymakers are concerned that trade negotiations with the United States, the country’s top trading partner, and jitters ahead of presidential elections in Mexico this July could hammer the peso. That could make it harder for the central bank to reach its 3 percent target.

The minutes of the Dec. 14 monetary policy meeting showed a majority of Banxico’s board members believe reaching the 3 percent inflation target will take longer than anticipated. The majority said inflation will be close to target rate by the end of 2018 and hover around 3 percent in 2019.

“In our assessment, the central bank remains excessively confident that inflation will converge back to the 3 percent target by end 2018. This is too optimistic, in our assessment,” said Ramos.

The January annual inflation rate was the lowest since April 2017. Consumer prices MXINFL=ECI rose 0.53 percent in January, according to non-seasonally adjusted figures.

The core index, which strips out some volatile food and energy prices, rose 0.28 percent during the month MXCPIX=ECI.

Reporting by Anthony Esposito; Editing by Bernadette Baum

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