Carstens defends step to “collaborate with growth”

Carstens defends step to “collaborate with growth”

Mexico Economy & Policy Corporate & Sovereign Strategy

Mexican central bank governor Agustín Carstens
Source: Banco de México
Mexico’s central bank governor Agustín Carstens has defended what he said was a decision to “collaborate with growth” in an unexpected 50bp rate cut that took markets by surprise in June.

“If we can collaborate with growth, without affecting the compliance of our mandate, we will do so,” he said in an interview with LatinFinance in his office in Mexico City. “We believe we can converge to the 3% inflation objective at the beginning of 2015 with a [base] rate of 3%.”

After the cut, which brought the base rate to a historic low of 3%, some private sector economists wondered whether growing impatience in Mexico with low growth under the reformist government of President Enrique Peña Nieto may have played a role.

But Carstens was quick to reaffirm the inflation-targeting mandate of the central bank. “The triggering of the action was not growth. The triggering of the action was [the question of] how could we converge to our inflation objective” he said.

“We take [growth] into account as long as [it] effects the inflation trajectory. Our main mandate is inflation, it’s not growth.”

Expectations ‘anchored’

Banxico's credibility in markets had been maintained, he said.

“Inflation expectations were anchored, are still anchored, and we are on our way to converge to the 3% inflation objective,” he said.

The inflation rate had fallen to 3.875%, from over 4% at the beginning of the year, partly due to the end of one-off effects from government fiscal measures.

Inflation would fall further early next year as the state moves towards a new fuel pricing policy, meaning smaller increases in domestic fuel prices, he said.

“We saw this perspective for inflation, and at the same time we realized that we had a rate of growth below our potential, and that our output gap was negative. That allowed us to realize that we could converge to the 3% objective, with a lower rate of interest. That’s why we acted: we believed that we could hit our target, on a lower rate of interest.”

Nevertheless, developments in June and July “ratified the fact that it would be difficult for us to reduce interest rates further in the near future”, he said. “It’s less likely now.” LF