Carstens Says Mexico Inflation to Slow Below 4% This Quarter

Mexico’s Central Bank Governor Agustin Carstens
Mexico’s central bank Governor Agustin Carstens said, “During this quarter it is very likely that inflation will come back to our range.” Photographer: Susana Gonzalez/Bloomberg

Mexico’s central bank Governor Agustin Carstens predicted inflation will slow this quarter to within policy makers’ targeted range and said 2012 economic growth probably will fall short of the high end of the bank’s projection.

Consumer price increases likely will slow to an annual rate of less than 4 percent this quarter after rains ended a drought that had caused a spike in agricultural prices, Carstens said in an interview yesterday. While a bird flu outbreak detected in western Mexico may cause a “blip” in egg prices, the rise won’t last, he said. The central bank targets inflation between 2 percent and 4 percent.

“During this quarter it is very likely that inflation will come back to our range,” Carstens said at his office in Mexico City’s old colonial center.

Mexico’s peso bond yields fell to a record low today after European and Chinese policy makers cut benchmark borrowing costs to spur growth, fueling a rally in higher-yielding assets. The yield on local-currency bonds due in 2024 dropped nine basis points, or 0.09 percentage point, to 5.30 percent at 9:08 a.m. in Mexico City, according to data compiled by Bloomberg.

The pace of gross domestic product growth in Latin America’s second-largest economy this year “depends mostly on the U.S. economy” and probably will be between 3.5 percent and 4 percent, he said. He later added it appears “less likely” GDP expansion will reach the 4.25 percent that is the upper limit of the central bank’s May forecast.

‘Quite Well’

“Our economy has been performing quite well,” he said. “In the main areas so far the figures that are being produced are very good. Growth seemed to continue even in June.”

The peso’s weakness in the second quarter was caused by global investors’ aversion to riskier, higher-yielding assets amid concern Europe’s debt crisis would worsen, he said. Improvement in the U.S. and Europe, combined with Mexican economic expansion, could push the currency to near 12 per dollar, a level it held for much of the first half of 2011, he said.

“I wouldn’t be surprised if certain scenarios present themselves, we could see exchange rates close to that level,” he said, specifying it was not an official forecast. “Given that we have no structural problems in the financial system, you would think the peso has room to appreciate.”

Mexico’s GDP

After weakening to 14.3755 per dollar on May 31, the peso has since climbed 7.8 percent, the most among 16 major currencies, to 13.3337 yesterday. Europe’s crisis and slow growth in the U.S., which buys 80 percent of Mexico’s exports, helped make the peso Latin America’s worst-performing major currency last year with an 11.5 percent drop.

Mexico’s economy grew 4.6 percent in the first three months of 2012 from a year earlier, the fastest pace in six quarters, helping fuel a consumer price increase of 4.3 percent in the 12 months through mid-June. The U.S. economy expanded 1.9 percent in the first quarter, compared with 3 percent in the prior period. U.S. unemployment has exceeded 8 percent since February 2009, the longest stretch in monthly records dating to 1948.

Banco de Mexico has maintained the nation’s benchmark lending rate at a record low 4.5 percent for 27 straight meetings. The next policy decision of the five-member board is July 20.

“We believe that a neutral stance is adequate,” he said, citing strong domestic growth coupled with international volatility.

Carstens, 54, said Mexico hasn’t yet made a decision on whether to seek renewal of its flexible credit line from the International Monetary Fund, which expires in January. That choice will be made with incoming President Enrique Pena Nieto’s government, he said.

Flexible Credit

In 2009, Mexico was the first nation to receive a flexible credit line from the IMF, a mechanism to help support economies deemed to have strong fundamentals. Mexico’s original $47 billion credit line was boosted to $72 billion in January 2011.

The country has never tapped the loan. Colombia and Poland are the only other nations with similar IMF agreements.

Carstens, a former finance minister and IMF deputy managing director who sought the fund’s top job in 2011, said it’s important that the multilateral lender continue to offer flexible credit lines even as it concentrates on bolstering the European economy. Europe’s crisis shouldn’t hinder the IMF’s ability to offer the lines, he said.

Christine Lagarde prevailed over Carstens to become IMF managing director last year.

The IMF, based in Washington, should strive for crisis prevention in addition to crisis resolution “and also to give clear incentives to good performers,” he said.

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