Carstens Says Monetary Policy No Tool for Most Farm Prices

Tightening monetary policy isn’t effective for combating increases in Mexican agricultural prices, which have normally proved transitory, according to central bank Governor Agustin Carstens.

“High volatility in some agricultural food prices doesn’t normally represent a problem that should or can be faced with the tools of monetary policy,” Carstens said today in a speech in Guadalajara, Mexico at a conference on food security. “Hens don’t lay more eggs in response to a rise in interest rates.”

Banco de Mexico’s policy and communications have increasingly helped anchor inflation expectations, Carstens said, a day after forecasting the pace of consumer price increases will slow toward the mid-point of the bank’s 2 percent to 4 percent target range at the start of 2015. Annual inflation slowed to 3.89 percent in the first half of March, within the target range for the first time since December.

The central bank will keep its key interest rate at a record-low 3.5 percent until the second quarter of next year, when it will increase borrowing costs by a quarter point, according to the median economist projection in a Bloomberg survey.

Carstens’s comments today “reinforce the intention of Banxico to remain on hold for the rest of the year,” Marco Oviedo, Barclays Plc’s chief Mexico economist, said in an e-mailed response to questions. “If we observe more agricultural price shocks, the board will not react immediately, if no contamination to other prices is observed.”

‘Well Behaved’

Mexico’s peso advanced 0.4 percent to 13.0809 per U.S. dollar at 2:57 p.m. in Mexico City after earlier touching the strongest intra-day level in more than two months.

The annual inflation rate jumped at the start of the year, reaching 4.48 percent in January, after an 8 percent levy on junk food and 1 peso-per-liter tax on soda pop took effect, along with higher sales taxes in regions bordering the U.S.

Annual core inflation, which excludes more volatile agricultural and energy prices, fell to a record-low 2.37 percent in August and was 2.84 percent in the first half of March, below the mid-point of the target range.

“Core inflation will remain well behaved,” staying near current levels for the rest of the year, said Oviedo, who expects Mexico to increase interest rates in the first quarter of 2015.

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