Carstens Says Mexico Won't Hesitate on Rates, Peso Interventions

  • Central banker says Feb. moves shouldn't have been a surprise
  • Authorities' recent actions are achieving desired results

Mexico central bank Governor Agustin Carstens said policy makers won’t hesitate to use interest-rate increases and currency interventions if their inflation goal is threatened, and that their moves last month are achieving the desired results.

Speaking at the nation’s annual banking convention at a beach resort in Acapulco on Thursday, Carstens said that while the moves in mid-February by the central bank and Finance Ministry surprised some market participants, they shouldn’t have since they were the results of meticulous analysis by the nation’s monetary and fiscal authorities.

On Feb. 17, Mexico jolted investors with a pair of surprise moves aimed at stemming a rout in the peso and preventing inflation from taking hold. In a rare coordinated announcement, the central bank raised borrowing costs 0.5 percentage point to 3.75 percent between scheduled meetings and the Finance Ministry announced spending cuts. The central bank also replaced its daily dollar-auction program with a plan to sell greenbacks directly to banks whenever needed to support the currency.

The moves “simply represent the use of the instruments of stabilization that we have at our disposition," Carstens said in a 20-minute speech. “Speaking for the Bank of Mexico, we won’t question using them again if it’s necessary.”

Carstens noted that since the moves, the nation’s currency has strengthened, its yield curve has flattened, the IPC benchmark stock index has climbed and the price of insuring its debt against non-payment with credit-default swaps has diminished.

Carstens said automated high-frequency traders looking to benefit from the nation’s previous dollar auction structure contributed to the peso’s volatility at the start of the year and eroded the effectiveness of the program.

The former International Monetary Fund deputy managing director also said that central banks alone can’t bring about sustained growth, urging nations to adopt sound fiscal policies and overhauls to make their economies more efficient and productive.

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