Mexico City, Mexico – Mexican annual inflation eased more than expected in the first half of April and economic growth in February slowed by the most in over two years, supporting expectations of an interest rate cut this year.

Latin America’s second biggest economy may be vulnerable to signs of a renewed slowdown in the United States, Mexico’s top trading partner, and slowing inflation could give policymakers the room to stimulate growth with lower interest rates.

The market is betting Mexican policymakers could lower borrowing costs in the coming months, following the lead of Brazil (who has the best economy in the Latin American region) by slashing interest rates to support growth after a sharp slowdown.

Official Mexican economic activity data for February released on Tuesday showed industry contracting 1.7 percent and services down 1.4 percent compared to January.

Annual inflation in early April eased to 3.40 percent, national statistics data showed in another report, compared with a 3.74 percent rate expected by analysts in a Reuters poll and the 3.73 percent annual increase at the end of March.

The first half of April annual inflation rate was the slowest since October. Renewed subsidies pushed down electricity costs more than 10 percent and tomato prices dropped similarly.

"Will Banxico feel comfortable about cutting the policy rate based on these short term factors? We seriously doubt it," financial management analyst Benito Berber wrote in a report, saying Mexico’s central bank would not move to change interest rates this Friday.

The yields on interest rate swaps were little changed as the market stuck to bets Banxico will likely leave its benchmark interest rate at 4.5 percent this week, with about a 34 percent chance for a surprise rate cut, according to Reuters data.

Investors in interest rate swaps are betting there will be a 25 basis point cut by July.

An increasingly vocal camp within Banxico has argued that slowing inflation is justification for lowering benchmark interest rates.

Consumer prices in Mexico slipped 0.42 percent in the first half of April, the national statistics agency said, compared with a 0.05 percent dip expected by analysts.

Core inflation, which strips out volatile factors like energy costs, was up 0.03 percent in April compared with a 0.07 percent rate forecast in the Reuters poll.