Mexico's inflation overshoots forecasts, but rate cuts expected to continue

April 24 (Reuters) - Mexico's annual headline inflation accelerated more than expected in the first half of April, but that should not prevent the central bank from continuing to cut interest rates as Latin America's second-largest economy shows signs of weakness.

Consumer prices in Mexico rose 3.96% in the 12 months through mid-April, statistics agency INEGI said on Thursday, up from 3.67% a month earlier and above the 3.89% expected by economists in a Reuters poll.

That was the highest reading for the index since December. But inflation remains within the Bank of Mexico's 2% to 4% target range, which, coupled with weakening economic activity, has allowed policymakers to lower borrowing costs.

The central bank last month cut its benchmark interest rate by 50 basis points to 9%, the second consecutive reduction of that magnitude, and said it may consider similar cuts going forward if the inflation environment allows.

Its next rate announcement is scheduled for May 15, and analysts believe the weak economic outlook stemming from global trade tensions will add to the argument for the monetary easing cycle to continue.

As the impacts of U.S. President Donald Trump's sweeping tariffs hit, the International Monetary Fund earlier this week forecast the Mexican economy - strongly intertwined with that of the United States - to contract 0.3% this year.

"Banxico has been paying more attention to the weakness of the economy at recent meetings," said Jason Tuvey of Capital Economics, adding that the rise in inflation in early April was unlikely to shift its focus away from that.

"We expect it to deliver another 50-basis-point interest rate cut at its meeting next month," he said.

In the first half of April alone, Mexican consumer prices were up 0.12%, while economists forecast a 0.09% rise.

The price increase in the period was mainly driven by core prices, according to INEGI data.

The closely watched core index, which strips out some volatile food and energy prices, climbed 0.34% in early April and 3.90% in 12 months. Both exceeded the 0.21% and 3.78% rates expected in the Reuters poll, respectively.

Pantheon Macroeconomics' chief Latin America economist Andres Abadia said that, although inflation has edged higher in recent weeks, underlying pressures should remain subdued given the broad-based economic slowdown.

"This backdrop should allow policymakers scope for further easing," he added, also forecasting a 50-basis-point cut in May.