Mexico Peso Drop Has Limited Impact on Inflation, Ramos Says
January 13, 2012, 2:36 AM ESTBy Nacha Cattan
(Updates with Ramos Francia comment in fourth, fifth paragraphs, analyst comment in the sixth paragraph.)
Jan. 12 (Bloomberg) -- Mexico’s consumer prices have absorbed the shocks to the country’s exchange rate “very well,” central bank Deputy Governor Manuel Ramos Francia said.
Mexico’s monetary policy has been consistent with a downward inflation trend and policy makers have felt comfortable with their 4.5 percent benchmark interest rate, he said during an event in Mexico City today. Banco de Mexico has kept the key rate at a record low since July 2009 and is the only major Latin American central bank to leave rates unchanged over the past year.
Mexico’s peso has weakened 14 percent against the dollar since June 30, the worst performance among major Latin America currencies. While the weaker peso has pushed up import costs, inflation has only accelerated to 3.82 percent in December from 3.28 percent in June. Policy makers’ target range for annual inflation is 3 percent, plus or minus 1 percentage point.
“There will be pass-through to imported goods and in a greater measure to merchandise,” though it has been less than in previous decades and keeps shrinking, Ramos Francia said. In the service industry, the impact has been “statistically equal to zero,” he said.
Peso Impact
The depreciation “has not in any way” impacted “well- behaved inflation,” Ramos Francia said.
Alberto Ramos, a senior Latin America economist at Goldman Sachs Group Inc., said Ramos Francia’s downplaying of the currency’s impact “is reassuring as it reduces significantly the probability that the central bank could be tempted to hike rates to anchor the currency.”
The bank will keep rates on hold “in the near-term and likely for the foreseeable future,” Ramos said in an e-mailed research note today.
The peso’s weakness has begun to affect prices for tradable goods, said Mario Correa, chief Mexico economist at Grupo Financiero Scotiabank SA in Mexico City. It may become apparent in inflation reports during the first quarter whether price increases will spread to the service sector, he said.
“If these increases in prices shift over to services, that’s when you have a bigger inflation problem,” Correa said. “That’s when the bank is forced to act. We still haven’t seen this.”
The peso strengthened 0.5 percent to 13.5347 as of 4:00 p.m. in Mexico City.
--Editor: Robert Jameson
To contact the reporter on this story: Nacha Cattan in Mexico City at ncattan@bloomberg.net
To contact the editor responsible for this story: Joshua Goodman at jgoodman19@bloomberg.net
