Exclusive: High rates help Mexico weather NAFTA talks, premature to talk of cuts - Carstens

By Anthony Esposito and Frank Jack Daniel


MEXICO CITY (Reuters) - Mexico's central bank could pause monetary policy tightening for some time, its governor said on Thursday, but he defended high interest rates at a time of political volatility and knocked down speculation there will be rate cuts before mid-2018.


Banco de Mexico Governor Agustin Carstens said talk among private economists that rates would be reduced early next year diverged from the bank's view, which was that it would take some time to consolidate inflation toward its 3 percent target.


He also said Mexico's tight monetary and fiscal policy was good preparation for possible volatility stemming from presidential elections next year and NAFTA negotiations that may start in a few weeks.


"Mexico has prepared itself for the months to come," he said.

The Mexican peso <MXN=D2> firmed 0.52 percent on Thursday, its sixth straight daily gain, and appreciated after Carstens' comments were published.

Carstens told Reuters it was likely the bank would pause a run of seven consecutive base rate hikes at its next policy meeting on Aug. 10, firming up language used in the last monetary policy statement.

"That pause may last, but to anticipate that early next year we will start reducing rates, that is running too far ahead. The board has not been discussing that," he said in an interview at the central bank's Art Deco headquarters in Mexico City.

In its fight to control inflation that is at a more-than eight-year high, the bank's board raised interest rates a quarter percentage-point to 7.00 percent at last month's meeting, with one member voting to hold them steady.

Monetary policy is at its tightest since early 2009, with 400 basis points of hikes since the end of 2015. Carstens said he believed Mexico was not very far away from a peak in inflation, which the central bank board sees in the second half of the year.

He said he expected inflation to fall faster than private economists' forecasts, but said it would take time to consolidate at those levels.

Inflation expectations in analysts' polls conducted by the central bank have risen steadily in the past few months, although most see price increases approaching their peak. Lower inflation is expected in January when the statistical impact of fuel price increases wears off.

Capital Economics on Thursday said inflation would peak in a couple of months and forecast cuts in the policy rate at the start of 2018. It said rates would drop to 5.50 percent by year-end 2018.

"Where there might be some difference with the market is that where the market might expect us to reduce rates early next year, or during the first six to nine months, I think it is too premature to be making forecasts about what the bank might do," Carstens said.


Carstens, 59, is due to leave the Central Bank in November to take the top job at the Bank for International Settlements (BIS), cutting short a tenure meant to have lasted until 2021. He said he would have liked to have left the bank with inflation below its 3 percent objective, but said he believed the institution was in good shape.

Decisions on what to do with rates will be left to the rest of the bank board and his successor, who has not yet been named. Finance Minister Jose Antonio Meade is seen as a strong candidate, although some would like him to run for president.

Carstens said high rates and the government's commitment to tight fiscal policy should help the country weather volatility related to presidential elections next year and NAFTA negotiations, which may begin as soon as next month.

The current favorite to win the July presidential election is veteran leftist Andres Manuel Lopez Obrador, who has moderated his economic policies in recent years but whose political fortunes still impact the peso.

The biggest factors that buffeted the peso this year were an increase in fuel prices and fears that U.S. President Donald Trump would tear up NAFTA earlier, contributing to the spike in inflation.

"I think the market conditions have improved dramatically from the beginning of this year," he said. "The strength of our monetary policy also anchors much better the exchange rate."

Carstens, who earlier warned a Trump presidency would be a horror movie for Mexico and as destructive as a powerful hurricane, said talks about NAFTA had so far been smoother than expected.

"If you ask me if my weather forecasting was accurate, I would say no it was not accurate," he said.

He further defended high rates by saying that he did not see the current stance as a major factor in slowing the economy. The central bank forecasts gross domestic product growth of 1.5 percent to 2.5 percent in 2017.

Bank of America Merrill Lynch on Thursday said it expects the Mexican economy to grow at 1.8 percent in 2017, citing tight fiscal and monetary policies, together with uncertainty over NAFTA, as factors that would further slow growth to 1.3 percent in 2018.

(Reporting by Anthony Esposito and Frank Jack Daniel; Editing by Andrew Hay and Lisa Shumaker)

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