Mexico's central bank has named a weaker peso as the biggest stumbling block to cutting interest rates but its own analysis shows that currency depreciation is having little impact on consumer price inflation.
In its quarterly inflation report, the central bank said on Wednesday that inflation was expected to remain within its comfort zone next year in a range of 3.0 to 4.0 percent.
Bank of Mexico Governor Agustin Carstens said if it was not for high tortilla and tobacco prices, core inflation would be right on the central bank's 3.0 percent inflation target. Although the central bank warned that it would closely watch for signs that peso depreciation was pushing up inflation, so far the outlook is benign. Peso depreciation might raise import prices and push the central bank into raising interest rates from the current 4.5 percent benchmark, rather than the cutting them as expected by many in the market.
At the same time, the weaker currency is supporting economic growth by helping exporters and it means the central bank can afford to take a steady-hand approach at its next policy meeting on December 1, although many analysts expect a rate cut in 2012.
"The monetary policy decision will be closely tied to the behaviour of the exchange rate," said Gabriel Casillas, an economist at JPMorgan in Mexico City.