October 8, 2012 / 1:55 PM / 5 years ago

UPDATE 2-Mexico peso rise to help cool inflation: cenbank chief

3 Min Read

* No hesitation to use policy tools if inflation too high

* Central bank chief notes important to proceed with caution

MEXICO CITY, Oct 8 (Reuters) - A recent rise in Mexico's peso should help offset the impact of higher prices and limit the increase in inflation, central bank governor Agustin Carstens was quoted as saying on Monday.

Annual inflation breached the central bank's 4 percent tolerance threshold for a fourth straight month in early September, accelerating to a 2-1/2 year high of 4.73 percent.

Carstens said the central bank was not comfortable with current high inflation, but also stressed it was important not to choke growth with premature or ineffective interest rate rises.

"There's a very important mitigating factor looking forward which is that the exchange rate has appreciated significantly in the past month, which mitigates the impact of higher commodity prices and of some of the goods in dollars," Carstens told newspaper 24 Horas in an interview.

The peso fell to a three-year low in early June, dragged down by fears about the euro zone debt crisis. By the end of September though, it had rebounded more than 13 percent against the dollar.

At its last meeting the central bank said it would not hesitate to raise interest rates - which have been held at 4.5 percent since mid-2009 - if price pressures became more generalized.

"We're evaluating the whole environment," said Carstens. "It's not certain that there's a generalized increase in prices but it is a complex situation in which the Bank of Mexico isn't comfortable with inflation above four percent, and if circumstances require we won't hesitate to use our instruments."

Still, investors currently price in no rate hike until April 2014 and Carstens said it was important not to act in haste.

"We have to be cautious and not introduce anything which might cost growth when the situation could be resolved by itself or when monetary policy might not have the desired effect," he said.

A spike in fresh food prices partly caused by an outbreak of avian flu has helped to fuel inflation, and policymakers have said they expect the increase to be temporary.

Carstens said he expected Mexico's economy, the second-largest in Latin America, to grow close to 4 percent this year and maybe 3.7 percent next year.

He said the country's reliance on oil revenue from state monopoly Pemex was limiting potential growth and urged policymakers to consider more private investment in the oil sector, something incoming president Enrique Pena Nieto has named as a priority.

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