Mexico Rate Below 3.5% Not Adequate for CPI Goal, Carstens Says

Mexico’s central bank shouldn’t cut the key interest rate any lower than the current 3.5 percent as tax increases give a temporary boost to inflation, Governor Agustin Carstens said.

“Taking into consideration the impact of the fiscal reform, a rate below 3.5 percent at this time, is not necessary, adequate for the convergence” of inflation to the central bank target of 3 percent, Carstens said in an interview.

Carstens comments echo those by policy makers when they cut the benchmark rate by a quarter point to a record low on Oct. 25 and said that reducing borrowing costs beyond this level wouldn’t be advisable. Speaking during The Economist’s Buttonwood Gathering in New York, Carstens defended the decision on the basis of a moderate inflation.

“We are going to have a transitory shock in part from the fiscal measures” being discussed in congress, Carstens said. “Therefore, in a scenario of 18 months, there shouldn’t be any problem with the convergence” of inflation.

Mexico’s inflation rate fell to 3.27 percent in mid-October, the slowest pace since January and close to the central bank target of 3 percent.

Mexico’s senate gave preliminary approval late yesterday to the tax initiative submitted by President Enrique Pena Nieto that would boost the income tax ceiling to 35 percent from 30 percent and impose a new 10 percent tax on capital gains.

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