UPDATE 2-Mexico retail sales slump, bets rise for rate cut

MEXICO CITY, Feb 21 (Reuters) - Mexican retail sales fell by

the most in over a decade in December, reinforcing bets the

country's central bank could soon cut interest rates to support

growth in Latin America's no. 2 economy.

Retail sales fell 3.6 percent from the prior

month, missing expectations in a Reuters poll for a 1.1 percent

contraction, on a drop in sales of electronic goods, computers

and cars.

It was the steepest decline since February, 2001 and came in

well below the downwardly revised 0.73 percent expansion notched

in November.

'It is a surprising fall,' said Pedro Tuesta, an economist

at 4Cast in Washington DC.

Healthy consumer spending helped Mexican output heat up in

the fourth quarter last year, picking up the slack from a dip in

manufacturing that had previously sheltered the country from the

worst of the global slowdown.

Yields on Mexican interest rate swaps edged lower

after the data as investors added to bets that the central bank

could cut its 4.50 percent benchmark rate as soon as March.

The Mexican economy moves in lockstep with that of its

northern neighbor, where politicians narrowly averted a package

of tax hikes and spending cuts originally set to kick in in

January.

'People were very concerned about what was going to happen

with the U.S. fiscal cliff,' Tuesta said. Slowing U.S. growth

would likely push Mexican consumers to retrench.

Some $85 billion in spending cuts will begin to hit the U.S.

economy after March 1 if lawamkers do not soon reach a deal.

Mexico's central bank will be closely watching the outcome of

talks as it heads into a rate decision meeting next month.

The bank has said it could cut interest rates if inflation

continues to cool and the economy flags. Mexico's economy grew

3.9 percent in 2012 and is expected to slow to 3.5 percent

expansion this year.

The market is pricing in slightly more than even odds of a

25 basis point cut in March, and eyeing a good chance for a

half-percentage point cut during the year.

MIXED SIGNS

Retail sales in November were boosted by a long-weekend when

stores offered discounts right after early year-end bonuses,

sapping some of December's demand.

Mexican consumer confidence slipped off of a nearly

five-year high in January as shoppers in Latin America's second

biggest economy showed less willingness to make big purchases.

That same month the Mexico's retailers' association

announced a feeble 0.5 percent growth in sales in January at

stores that have been open at least 12 months.

The association has still said it is eyeing 5 percent growth

in 2013 on continued strength in department store sales.

The statistics agency also said on Thursday that retail

sales in December dropped 1.8 percent from a year

earlier, compared to expectations for a 2.1 percent rise and a

3.5 percent annual rate in November.

(Reporting by Alexandra Alper; editing by Andrew Hay)

Keywords: MEXICO ECONOMY/

(Alexandra.Alper@thomsonreuters.com)(+5255-5282-7142)(Reuters Messaging: alexandra.alper.thomsonreuters.com@reuters.net)

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