Mexico central bank Governor Agustin Carstens said there’s a “high probability” that policy makers will need to raise borrowing costs this year given the likelihood of tighter monetary policy in the U.S.
“With the imminence of an increase in interest rates in the U.S., there’s a high probability that interest rates in Mexico will need to increase this year,” Carstens said in a speech today at the Mexico Autonomous Institute of Technology in Mexico City.
Banco de Mexico has cut its key rate by 1.5 percentage points to a record-low 3 percent since March 2013 in a bid to boost growth that has missed economists’ estimates over the past two years. Carstens said policy makers expect inflation to come close to 3 percent by the middle of the year as the effects of last year’s tax increase fade, gasoline prices increase more slowly and growth remains weak. The economy is likely to grow below potential for all of 2015 and a “good part” of 2016, Carstens said.
Inflation slowed to 4.08 percent in December from 4.17 percent the month before, remaining above the 2 percent to 4 percent target range for a sixth month. The annual pace of consumer prices increases will probably end 2015 at 3.5 percent, according to a survey of analysts published yesterday by Citigroup Inc.’s Banamex unit.
“We have to be agile in adjusting the level of interest rates if we see that the expected pattern of inflation deviates from that which I just showed you,” Carstens said. The annual rate has been slowing for two months, and the central bank governor said it will probably show a sharp deceleration in January and converge on 3 percent this year.
Mexico’s peso strengthened 0.2 percent to 14.6863 per U.S. dollar at 2:17 p.m. in Mexico City. The currency slumped to the lowest level since March 2009 this week amid expectations for a Federal Reserve rate increase and tumbling oil prices.
Upcoming communications from Banco de Mexico’s five-member board will probably reflect Carstens concern with the external factors he highlighted today, said Alonso Cervera, Credit Suisse’s chief economist for Latin America, who attended today’s speech.
“Governor Carstens could have simply ratified today recent policy messages from the bank’s board, but he chose to express his own view as well, which has an undeniable hawkish tilt,” he said in an e-mailed response to questions.
While the inflation pass-through from the currency’s weakness is “very low” and less than 15 or 20 years ago, Carstens said the board will pay careful attention to Mexico’s monetary policy posture relative to the U.S. and the degree of slack in the economy.
Forecasts by Federal Open Market Committee members show most expect an initial increase in U.S. rates some time in 2015, though recent speeches indicate they differ on the precise timing. With the U.S. economy strengthening and unemployment at a six-year low, the FOMC in December dropped a pledge to keep interest rates low for a “considerable time.” The panel instead said it will be “patient.”
[readon1 url="http://www.bloomberg.com/news/2015-01-08/carstens-says-high-probability-mexico-raises-key-rate-in-2015.html"]Source: www.bloomberg.com[/readon1]