Mexican central bank Governor Agustin Carstens said policy makers sent a “stronger message” about their commitment to fighting inflation after alerting investors that they are closer to raising interest rates.
The central bank kept its benchmark rate at a record low 4.5 percent yesterday amid sluggish global economic growth, while warning that if pressures stemming from an increase in food prices persist policy makers could raise borrowing costs “soon.”
“We expressed our deep concern about how inflation is moving and that we’re willing to act to preserve our mandate, which is to keep inflation under control,” Carstens told reporters yesterday in Minneapolis after a speech to the Economic Club of Minnesota.
Short-term inflation risks have increased, even as the outlook for economic growth has deteriorated amid a worsening global scenario, the bank said in a statement accompanying its decision. While inflation slowed in the first half of October, bolstering the central bank’s argument that the impact of a drought and a bird flu outbreak are temporary, it has remained above the 2 percent to 4 percent target range for more than four months.
The statement was the most “hawkish” since Carstens took office in January 2010 and a “masterful” move that should help reduce inflation expectations, Nomura Holdings Inc. said in a report after the decision.
“The press release definitely has a verbally hawkish tone, but being verbally hawkish doesn’t mean you’re going to hike rates immediately,” said Fernando Losada, an economist at Deutsche Bank Securities Inc. in New York. “The risks are now that the rate hike will happen earlier rather than later, but still our call is that there won’t be any rate changes next year.”
While inflation in Mexico slowed in the first half of October to 4.64 percent, bolstering the central bank’s argument that the impact of a drought and an outbreak of bird flu are temporary, it has remained above the 2 percent to 4 percent target range for more than four months.
“Inflation is expected to keep decreasing in coming months to reach very close to 4 percent toward the end of the year,” the bank said. “If inflation shocks persist, even though they are presumed to be temporary, and the trend in general and core inflation aren’t confirmed, the board thinks that it would be appropriate to carry out an upward adjustment soon in the reference interest rate.”
Mexico’s peso strengthened yesterday, posting the only advance among major Latin American currencies. The currency gained 0.2 percent to 12.9897 per dollar in Mexico City, trimming the weekly drop to 0.8 percent. The peso has appreciated 7.3 percent this year, the most among 16 major currencies tracked by Bloomberg.
Carstens said that there’s a greater risk that his forecast for prices to fall to within the bank’s target range by year-end won’t be met.
“There are risk factors that are present and have increased and that might make it more difficult to bring down inflation without monetary policy instruments,” Carstens said.
The only Group of 20 nation to leave borrowing costs unchanged and not step up asset purchases in the past three years, Mexico will wait until March 2014 to raise rates by a quarter percentage point, according to a Citigroup Inc. survey of economists published Oct. 22.
Carstens also said that the nation deserves a credit-rating upgrade. Mexico’s economy is set to grow 3.8 percent this year, compared with 2.1 percent expansion in the U.S. and a 0.5 percent contraction in the euro area, according to the median estimates of economists surveyed by Bloomberg.
“We certainly believe Mexico should get an upgrade,” Carstens said. “We have done the job, we have preserved and strengthened our policy stance. I think our performance through these trying times in the world economy shows our resilience.”
As finance minister in 2009, Carstens guided Mexico through a 6.2 percent economic contraction sparked by the swine-flu scare and Lehman Brothers Holdings Inc.’s collapse. Mexico has boosted foreign reserves by 78 percent since then to a record $161.9 billion in the week ended Sept. 28.
Still, Mexico remains rated BBB at Standard & Poor’s and Fitch Ratings. Both agencies downgraded the nation to that level in 2009, citing declining crude output from state-owned Petroleos Mexicanos, the source of about a third of federal budget funding.