Carstens Ready to Raise Mexico Rate If CPI Forecasts Stay High

(Bloomberg) -- Mexico’s central bank is "absolutely" prepared to raise the key rate if inflation expectations continue to run well above the 3 percent target even as economic growth slows, Governor Agustin Carstens said.

"We have the conviction that the best way Banco de Mexico can contribute to growth is by keeping financial stability and inflation expectations in line," Carstens said in an interview with Bloomberg TV.

Carstens Ready to Raise Mexico Rate If CPI Forecasts Stay High

Outgoing Banxico Governor Agustin Carstens discusses monetary policy, structural reforms and tackling growth.

(Source: Bloomberg)

Carstens, who announced Thursday that he’s departing the central bank to head the Bank of International Settlements in July 2017, was responding to news today that economists in a central bank survey saw inflation rising significantly above Banco de Mexico’s 3 percent target next year.

Carstens Ready to Raise Mexico Rate If CPI Forecasts Stay High

At the same time, the analysts slashed growth expectations by more than half a point for next year as the nation struggles with a worsening scenario amid promises by U.S. President-elect Donald Trump to renegotiate or scrap its free-trade deal with Mexico, which sends close to 80 percent of its exports to its northern neighbor.

Asked if 2017 inflation expectations at 4.01 percent, up from 3.57 percent a month earlier, makes it more likely that the central bank will have to raise rates, and sooner, Carstens said that the board is waiting for the actions of the Federal Reserve as an important component in the measures it takes.

Carstens said he is completely supportive of Trump’s Treasury Secretary nominee Steven Mnuchin’s pledges to simplify bank regulations and lower their administrative costs, but added that it was important to keep adequate safety levels. Mnuchin has said that the priority for the incoming administration is to scrap parts of the Dodd-Frank Act, and said the main problem with the regulation is that it’s too complicated and prevents banks from lending. The devil will be in the details of what Mnuchin proposes, Carstens said.