UPDATE 2-Time for rich nations to act on loose policy -Mexico's Carstens

Mon Oct 14, 2013 4:04pm EDT

By Dave Graham and Luis Rojas

MEXICO CITY Oct 14 (Reuters) - Rich countries must urgently take advantage of looser monetary policy to stabilize their economies and stimulate growth, without relying solely on central banks, Mexican central bank governor Agustin Carstens said on Monday.

He was speaking as lawmakers in the United States haggled over the U.S. debt ceiling while the world's No.1 economy stares down the barrel of a potentially devastating debt default.

Central bankers in several advanced economies have opened a space for their governments to implement fiscal, financial and regulatory reforms that should be seized, Carstens told central bankers from Europe, the Americas and Asia gathered at a forum in Mexico City on Monday.

"It is urgent that the countries most affected by the crisis effectively use this window of time that the central banks have offered," Carstens said. "Monetary policy alone can't solve the problems economies are suffering from."

President Barack Obama said on Monday there seemed to be progress in Senate fiscal impasse negotiations but that there is a good chance the United States will default on its debt if Republicans are unwilling to set aside some partisan concerns.

Carstens previously said Mexico was well placed to weather a U.S. default, citing $170 billion in Mexican reserves and its flexible credit line from the International Monetary Fund for use in an emergency.

"Mexico is well prepared to confront it," Carstens told El Economista in an interview published on Sunday evening. "We have taken due care in the management of international reserves and we are well provisioned."

"The problem is so serious because the obstacle is political in nature, not financial nor economic."

The chief economist at Mexico's finance ministry, Ernesto Revilla, said last week that Mexico's slowing economy could face an "extreme situation" if the United States fails to raise its debt ceiling.

RESPONSIBILITY TO THE WORLD

Mexico's economy has stumbled this year due to low government spending, a drop in construction and slack U.S. demand for local exports. The United States is Mexico's top trading partner, the destination of about 80 percent of Mexican exports.

Failure to reach a deal "would be very complicated, particularly if you factor in the Mexican slowdown," Gerardo Gutierrez Candiani, head of Mexico's Business Coordination Council, told Reuters.

"We hope they understand that their responsibility is not just to the United States but to the whole world," he added.

Following Mexico's shock economic contraction in the second quarter and devastating floods last month, the government has repeatedly cut back its growth forecast and now expects gross domestic product to expand by around 1.7 percent this year.

The International Monetary Fund last week said Mexico's gross domestic product (GDP) would grow 1.2 percent this year, down from the 2.9 percent expansion it forecast in July.

Taking advantage of cooling inflation, Mexico's central bank has cut its benchmark interest rate twice this year to a historic low of 3.75 percent, in a bid to boost sagging growth.

In a separate interview with Excelsior newspaper, Carstens said he sees a broader role for the bank than simply managing price hikes.

"Our duty is not just to (make sure inflation) converges towards its target, but to do it in the best way possible," he said in the interview published Monday. "If a space opens up, such as a chance to lower a reference rate, we have to take advantage of that opportunity," he said.

Data earlier this month showed annual inflation eased in September for the fifth month in a row to an eight-month low of 3.39 percent.

The central bank's annual inflation target is 3 percent.

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