Mexico Rate in Line for Now With Inflation Target, Carstens Says

Mexico’s key interest rate, cut to a record low in March, is in line with the central bank’s goal of lowering annual inflation to 3 percent as the peso weakens amid slower growth, central bank Governor Agustin Carstens said.

“We can evaluate this later on in our next meeting, but as of today I think that the monetary policy stance we have is adequate for achieving that convergence,” Carstens, 55, said in an interview yesterday at the Federal Reserve Bank of Kansas City’s annual policy symposium in Jackson Hole, Wyoming. The interview, taped for The Hays Advantage on Bloomberg Radio, is scheduled to air Aug. 26.

Strong fundamentals in Latin America’s second-largest economy mean the peso should be “relatively well behaved,” Carstens said. The currency has tumbled 7.9 percent from an almost two-year high in May on speculation the U.S. Federal Reserve, led by Chairman Ben S. Bernanke, will dial back record stimulus. Peso volatility isn’t a major inflation concern, he said.

Most economists expect the central bank to refrain from reducing interest rates again this year as the peso weakens, even after inflation and growth slowed, according to an Aug. 20 survey by Citigroup Inc.’s Banamex unit. The Finance Ministry cut its 2013 growth forecast to 1.8 percent from 3.1 percent this week.

Carstens’s comments “strengthen my position that the central bank will stay on hold,” Carlos Capistran, chief Mexico economist at Bank of America Corp., said in a telephone interview from Mexico City. “He understands very well that within the horizon in which monetary policy affects the economy, which is between six months and a year, things could be much better than they seem now on growth.”

Swap Rates

Capistran said Bank of America expects policy makers to leave rates on hold this year and next before raising them in 2015.

The chances of the central bank cutting rates in the next six months increased to 24 percent yesterday from 12 percent a week ago, based on swap-rates used to speculate on borrowing costs. The increase came after a report showed Mexico’s economy grew 1.5 percent in the second quarter from a year earlier, less than the 2.3 percent forecast by analysts in a Bloomberg survey.

Mexico’s annual inflation rate tumbled from 4.65 percent in April to 3.54 percent in mid-August, within the central bank’s 2 percent to 4 percent target range, on a decline in agricultural prices. Core inflation, which excludes energy and farm costs, dropped to an annual rate of 2.38 percent.

Feeling Comfortable

“We feel comfortable with the dynamic process of inflation in Mexico and how inflation responds to the monetary policy signals that the central bank emits,” Carstens said.

Non-core prices, which include energy and farm costs, aren’t a major obstacle to inflation converging on the central bank’s target, Carstens said.

“These are very volatile prices, and that doesn’t mean a major deviation from what we were expecting,” Carstens said. “I don’t see this as a major issue.”

Policy makers surprised analysts in March by cutting the benchmark interest rate to 4 percent amid signs the economy was slowing. They have kept borrowing costs unchanged at the past three rate decisions.

Mexico’s central bank cut its growth forecast in its quarterly inflation report on Aug. 7, projecting the slowest expansion in four years amid stagnant exports to the U.S. and a first-half drop in government spending. GDP will expand 2 percent to 3 percent, as little as half of last year’s pace and down from the 3 percent to 4 percent previously forecast, the bank said.

Potential Growth

Carstens said Mexico’s potential annual growth could accelerate to more than 5 percent within two or three years if the nation implements key economic reforms President Enrique Pena Nieto pledges to pass this year. Those include an end to Petroleos Mexicanos’s 75-year oil monopoly and a tax overhaul to wean the government off crude revenue.

“Mexico right now characterizes itself as being one of the countries that is pushing the most pro-growth reform agendas pretty much in the world,” Carstens said.

Exports to the U.S. should pick up in the second half of the year as the world’s biggest economy rebounds, Carstens said.

Participating in a discussion at the same symposium yesterday, Carstens called for monetary-policy coordination among advanced economies, saying that the withdrawal of stimulus by advanced economies is the “most pressing challenge” for emerging economies.

Policy Coordination

“For advanced economies it would be desirable to have a monetary policy coordination,” Carstens said. “To have the central banks of advanced economies go in different directions, can become a source of instability.”

Referring to plans for a reduction in the pace of central bank bond purchases, the central bank governor called for “a much better, clearer implementation of the tapering effort.”

Carstens, a former finance minister and International Monetary Fund deputy managing director who sought the organization’s top job in 2011 and lost out to France’s Christine Lagarde, has led Mexico’s central bank since January 2010. Under his leadership the bank has cut interest rates just once, by 0.5 percentage point on March 8.

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