Carstens Says Mexican Peso Undervalued, Has Room to Gain

  • Rates better than dollar sales to control inflation: Carstens
  • Banxico raised rate, began dollar sales in Feb. to help peso

Mexico’s peso is undervalued with room to appreciate even after its rebound from a record low, and interest rates are a better long-term tool than dollar sales to keep the currency from again threatening to spur inflation, central bank Governor Agustin Carstens said.

Mexico’s coordinated moves Feb. 17, when the central bank raised the key rate between scheduled decisions and the Finance Ministry announced spending cuts, have been "quite successful" in stabilizing the peso, Carstens said Wednesday. Given that the key rate, now at 3.75 percent, remains near an all-time low, Banco de Mexico can increase borrowing costs gradually and in line with the the U.S. Federal Reserve without hurting the economy, he said in an interview in his Mexico City office.

The currency has strengthened 9.3 percent since the coordinated move between the monetary and fiscal authorities, which also included beginning discretionary dollar sales to bolster the peso. In a 50-minute interview that touched on everything from Mexico’s economic outlook to Donald Trump, Carstens said he’s encouraged that state-owned oil giant Petroleos Mexicanos is taking the right steps to become a source of growth after 11 years of falling output.

While it’s hard to know the degree of the peso’s undervaluation, "my sense is that we still have margin for additional appreciation,” Carstens said, seated at a conference table in his fifth-floor office overlooking the capital’s historic center. In controlling inflation, "we don’t want to depend on instruments where the results might be short-lived, that’s why we don’t want to depend on interventions in the market," he said.

The peso gained 0.2 percent to 17.2782 per U.S. dollar on Wednesday. It reached a record low of 19.4448 per dollar on Feb. 11.

"I’m surprised that he’d say he prefers to raise rates," said Marco Oviedo, chief economist at Barclays Plc. "If the price of oil falls again, and the peso rises to 18, what kind of interest rate will return it to 17? One hundred basis points? That would be difficult."

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Pemex Debt

Carstens said he wouldn’t be surprised if sectors that have dragged, such as exports, begin to pick up “sooner rather than later.”

Mexico last week announced a hefty tax break and $1.5 billion for Pemex to help it pay contractors after debt levels at the company soared to new highs.

Pummeled by low oil prices, Pemex already reduced its staff by more than 10,000 employees last year and had its budget cut by $5.8 billion in February. Jose Antonio Gonzalez Anaya, the company’s chief executive officer, is telling analysts that they’ll hear by Thanksgiving how he plans to attract international oil companies to partner with Mexico’s troubled oil giant.

Asked about Republican presidential candidate Donald Trump, who has pledged to end or renegotiate the free-trade agreement known as Nafta, Carstens said the deal has brought benefits to the economies of the U.S., Mexico and Canada that are helping boost North America as an economic block.

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