Mexico City, Mexico - Mexico’s inflation rate fell for a second consecutive month this March, fueling speculation that policy makers may cut the overnight lending rate to bolster the economy.

Annual inflation slowed to 3.73 percent from 3.87 percent in February, the national statistics institute said on its website today. The median estimate of 12 analysts surveyed by Bloomberg was for prices to rise 3.76 percent. Prices climbed 0.06 percent from the previous month.

Inflation eased after a drought in the north of the country began to wane, reducing pressure on the cost of agricultural produce. The central bank said in the minutes of its March 16 rate meeting that it would consider lowering borrowing costs if inflation remained in check.

Today’s report “helps to build on the willingness of the central bank to reduce the benchmark rate,” said Gabriel Casillas, Mexico chief economist at JPMorgan Chase & Co. Still, “we continue to believe Banxico will stay on hold for a long time.”

The yield on Mexico’s fixed-rate peso-denominated debt due in December 2013 fell 11 basis points, or 0.11 percentage point, to 4.60 percent at 10:13 am in Mexico City, according to data compiled by Bloomberg. It’s the biggest daily decline since Nov. 30th. The price rose 0.17 centavo to 105.53 centavos per peso.

The peso weakened 0.1 percent to 13.0023 per U.S. dollar at 10:15 am Mexico City time, from 12.9842 April 6. The currency has appreciated 7.1 percent this year, the best performance of 16 major currencies tracked by Bloomberg, helping to limit inflation.

Prices for agricultural products fell 1.61 percent in March, while the cost of fruits and vegetables dropped 3.7 percent, the statistics agency said.

“It’s possible to say that the effect of the drought that we saw last year is fading away,” Casillas said in a telephone interview in Mexico City.

Core prices, which exclude food and energy, gained 0.24 percent in March from the previous month, the statistics agency said, less than the 0.28 percent median estimate of the 12 economists surveyed by Bloomberg.

Economists lowered their year-end inflation forecast to an average 3.78 percent from 3.88 percent, in a monthly survey by the central bank released April 2nd.

“With respect to the balance of risks for inflation, most of the board members agreed that it has improved,” policy makers said in the minutes of their March 16th meeting. “If current favorable conditions in the inflation outlook are consolidated, it may be advisable to adjust to the downside the reference interest rate.”

Still, inflation may accelerate in the next few months, in part because of higher commodity prices, said Gustavo Hernandez, economic analyst at ScotiaBank Casa Bolsa, which forecasts a year-end inflation of 4.04 percent.

The central bank last cut its benchmark rate in July 2009, bringing it to a record low 4.5 percent. The central bank next meets April 27th to decide on rates.