In Latin America's second largest economy, 12-month headline inflation reached 5.18% in the first half of June, data from statistics agency INEGI showed, slowing further but far from the central bank's official target of 3%.

The lowest since March 2021, the level overshot expectations of 5.30% in a Reuters poll of economists and reinforced bets the country's monetary authority will keep its benchmark interest rate steady when it announces its next decision later on Thursday. 

A rate cut remains unlikely after the Bank of Mexico, known as Banxico, paused a nearly two-year tightening cycle in May suggesting it might need to maintain rates at current levels for an extended period to bring inflation down to target.

Capital Economics' deputy chief emerging markets economist, Jason Tuvey, said Banxico would "almost certainly leave its policy rate on hold" after the latest consumer price figures, adding he did not forecast a rate cut this year.

"The strong labor market and rapid wage growth mean that inflation ... won't return to Banxico's 2-4% tolerance band until late-2024," Tuvey said. "And with the Fed also continuing to strike a hawkish tone, we think that rate cuts in Mexico will not be delivered until early 2024."

INEGI data also showed that annual core inflation, which strips out some volatile food and energy prices and has been a cause of concern for the central bank, slid to 6.91% in the first two weeks of June.

Analysts polled by Reuters had expected it to hit 7.02%.

On a fortnightly basis, headline consumer prices rose 0.02%, while core prices were up 0.11%, the statistics agency added, both also below market consensus.

With a "well-behaved currency and more benign inflation readings," Itau BBA economists believe the central bank might kick-off an easing cycle as soon as the fourth quarter.

"In our view, the central bank will keep the policy rate on hold until board members are more comfortable with the disinflationary process," they said. "(But) rate cuts are likely in the last quarter of the year."
 

Reporting by Gabriel Araujo Editing by Barbara Lewis and Mark Potter