Mexico's inflation undershoots forecasts ahead of rate decision

(Reuters) -Mexico's annual inflation slowed more than expected in the first half of September, official data showed on Tuesday, paving the way for the country's central bank to deliver another interest rate cut at a meeting later this week.

In Latin America's second-largest economy, 12-month headline inflation came in at 4.66% in early September, statistics agency INEGI said, below both the previous month's 5.16% and the 4.73% forecast by economists polled by Reuters.

The key figure remains above the Bank of Mexico's (Banxico) 3% target, plus or minus one percentage point, but will likely open the door for it to maintain a monetary easing cycle on Thursday, when it is set to announce its next policy decision.

Mexico's central bank last month lowered borrowing costs by 25 basis points to 10.75% in a divided vote.

Market participants expect another 25-basis-point cut to 10.50% this week, according to a Reuters poll, as annual headline inflation has now slowed for four consecutive fortnights.

"The fall in inflation, combined with the weakness of economic activity and the fact that the U.S. Fed is now easing monetary policy too, means that Banxico is all but certain to deliver another 25-basis-point cut," Capital Economics said.

In the first half of September alone, INEGI data showed, Mexico's consumer prices increased 0.09%, while economists in a Reuters poll projected a 0.15% rise. The lower-than-expected figure was related to a drop in food costs.

Mexico's closely-monitored core consumer price index, seen as a better gauge of price trends because it strips out volatile energy and food prices, hit 0.21% in the period, with the annual rate at 3.95% - both in line with market forecasts.

"Underlying inflation pressures are easing, and we expect inflation will continue to decline in the fourth quarter," Pantheon Macroeconomics said. "Moreover, falling expectations have enabled Banxico to implement interest rate cuts."

(Reporting by Gabriel Araujo; Editing by Ros Russell and Alex Richardson)