UPDATE 2-Mexico's Carstens sees no rate hikes for a while

Thu Dec 10, 2009 1:15pm EST

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(Rewrites throughout; adds Carstens quote and byline)

By Michael O'Boyle

MEXICO CITY Dec 10 (Reuters) - The man tapped to run Mexico's central bank said interest rates should be held steady, signaling policymakers may keep borrowing costs low for some time to help the economy recover from a deep recession.

"The Bank of Mexico will have time, a relatively long time, to revise its monetary stance. This should be reflected in similar rates to what we have now," Agustin Carstens said on Thursday a day after being nominated to lead the bank.

"There is not much core inflationary pressure," he told Mexican radio.

Carstens' comments added to investors' views that he will take more time to raise interest rates than would have been the case under outgoing central bank chief Guillermo Ortiz.

Carsten's comments pushed yields on Mexican interest rate futures due next year <0#TII:> lower, with the 28-day TIIE contract due in April falling 4 basis points to 5.21 percent.

"The remarks sound very dovish, and we acknowledge the risk that it may delay tightening," said Jimena Zuniga, an economist at Barclay's in New York.

The former finance minister was nominated on Wednesday to lead the central bank and is likely to be approved by Mexico's Senate this month.

Carstens, an economist trained at University of Chicago, is widely respected on Wall Street. He was the deputy managing director at the International Monetary Fund before taking the finance minister job and spent much of his early career at the central bank, rising to the post of chief economist.

His key challenge in coming months will be to keep inflation in check without choking recent economic growth after Mexico's worst recession since 1932. Output grew in the third quarter but is still far below pre-recession levels.

Carstens' perceived close ties to Calderon, who criticized Ortiz last year for keeping borrowing costs high, have raised questions among investors that his appointment could threaten the central bank's independence.

In a nod to those concerns, Carstens stressed he will work closely with President Felipe Calderon but will maintain the central bank's autonomy. He said he would listen to any presidential request to lower borrowing costs, but that he could turn the president down.

"It would be obligatory to listen to the president," Carstens said. "If he isn't right, (I would) tell him it cannot be done right now."

LOOMING TAX INCREASE

Mexico's economy fell into a tailspin late last year as the U.S. recession choked off demand for Mexican exports like cars and refrigerators.

Even as Ortiz lowered interest rates during the first half of this year to fight the recession, the economic slowdown cooled inflation because businesses were reluctant to raise prices during a downturn. Consumer prices rose 3.9 percent in the year through November, the slowest annual rate in nearly two years. [ID:nN09229032]

But inflation is likely to rise again early next year when series of tax increases take effect. With Ortiz at the helm, the central bank warned about tax-related inflation pressure, leading investors to bet on rate hikes next year.

Carstens, however, said inflationary pressures are not a problem at the moment and that the tax increases will have only a one-time impact on inflation. Moreover, he said Mexico's economy is continuing to perform below its potential, cooling inflation.

"A process of sustained increases going forward is not taking hold," Carstens said.

Carstens' exit from the finance ministry, and his replacement by a largely unknown official, Ernesto Cordero, led some to worry the ministry would become less effective, particularly in its efforts to push economic reforms.

Mexico's economy has grown at a slower rate than Brazil and Chile over the last decade because Mexican politicians have put off tough choices on how to reform tax and energy laws.

Cordero, however, said on Thursday he would be keeping Carstens' team in place, and promised to push reforms needed to improve economic growth. (Additional reporting by Veronica Sparrowe; writing by Jason Lange; Editing by Diane Craft)

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