Carstens Calls Rate Cut Response to Mexico’s Inflation Progress

Mexican central bank Governor Agustin Carstens defended the board’s decision to cut interest rates last month, saying the reduction recognized the nation’s advances against inflation.

The cut “responds to the structural advances that we’ve made as a country and at the bank in particular in lowering inflation,” Carstens said today, responding to a reporter’s question after an event in Ciudad Juarez, Mexico. “We’ve improved a lot in lowering core inflation, in lowering its volatility. Certainly, we’ve had some transitory shocks that we see diminishing soon. The internal and external environment allows us to presume that we’re going to converge on 3 percent, the inflation target, and we can do it with a lower rate.”

Banxico cut its benchmark interest rate by 0.5 percentage point to a record-low 4 percent on March 8, the first move in almost four years. The rate reduction came after inflation slowed to within the central bank’s target range in December and growth moderated. Mexican annual inflation quickened in the first half of March to 4.12 percent, defying the median estimate of economists by climbing back above the upper limit of the bank’s 2 percent to 4 percent target range.

Carstens said Mexico’s peso, which rallied to touch 12.1707 per U.S. dollar today, the strongest level since August 2011, is a reflection of the nation’s economic strength.

‘Good Combination’

“More than anything, I would leave this message: to the extent that we have a strong economy, we’re going to have a strong currency, and I believe this is a good combination of factors,” Carstens said.

Banxico’s decision to cut rates with inflation above the target sacrificed some credibility, and that could lead to higher inflation expectations, Benito Berber, a Latin America strategist at Nomura Holdings Inc., said in an April 2 note.

Mexican annual inflation will end this year at 3.85 percent, up from a previous estimate of 3.7 percent, according to the median estimate of economists surveyed by Citigroup Inc.’s Banamex unit. Banxico will keep rates on hold until January 2015, according to the survey, compared with a previous estimate of November 2014.

Mexico’s peso is seen ending 2013 at 12.30 per U.S. dollar, compared with the previous estimate of 12.40, the survey shows.

The bank’s board voted 4-to-1 last month for the cut, with the dissenter saying lower rates could threaten the inflation target. The split decision is the first for Banco de Mexico since it began publishing minutes from monetary policy decisions in February 2011.

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