Mexico's central bank left its benchmark interest rate unchanged at 4.50 percent, as expected, but repeated recent warnings that it will raise rates if inflation starts to accelerate. However, the bank added that upside risks to inflation have eased and described the recent fall in prices as "remarkable"
Banco de Mexico said there was no evidence so far of widespread price increases, with the recent rise in inflation due to temporary shocks, and the trend toward lower inflation seems to be confirmed.
"However, if new shocks to inflation - even if presumed to be transient and the trend in headline and core inflation are not consolidated - the Board believes that it could adjust the benchmark interest rate upward in order to strengthen the anchoring of inflation expectations, prevent the pollution to overall national prices and not compromise the permanent convergence toward the 3 percent target," Banco de Mexico said in a statement.
The bank said the decline in Mexico's inflation rate to 4.6 percent in October from September's 4.8 percent was remarkable but it was still above the central bank's target of 3 percent, plus/minus one percentage point, and is expected to end the year below 4 percent.
The turnaround in inflation was due to lower increases in core and non-core price components, helped by the rise in the Mexican peso since the middle of the year. The rise in the cost of services had fallen to a record low of close to 2 percent, reflecting domestic determinants of inflation.
The bank expects these factors to continue to help lower inflation with the headline rate continuing to decline in coming months with inflation trending toward 3 percent in 2013.
"Although in the short term there are major upside risks to inflation, it is considered that at the margin they have eased. Meanwhile, the slowdown in global economic activity points to lower inflationary pressures in the medium term," the bank said.
The central bank, which last changed its rate in June 2009, said there were still significant downside risks to the global economy and it expects a further easing of monetary policy in some advanced and emerging economies due to slower economic activity and lower commodity prices.
Economic activity in Mexico, however, maintained its upward trend, albeit at a more moderate pace than in recent quarters as consumption and investment have started to slow.
"In sum, derived from external developments, and in particular the U.S. economy, it is considered that the downside risks to the growth of the Mexican economy have increased marginally in the short term," the bank said.
Mexico's Gross Domestic Product expanded by 0.45 percent in the third quarter from the second, for an annual rate of 3.3 percent, down from 4.1 percent in the second quarter.