Mexico economy hampered by U.S., weather in first quarter: Carstens

NEW YORK Fri Mar 28, 2014 2:41pm EDT

Mexico's Central Bank Governor Agustin Carstens tests a microphone during a forum organized by Mexico's Central Bank in Mexico City October 14, 2013. REUTERS/Tomas Bravo

Mexico's Central Bank Governor Agustin Carstens tests a microphone during a forum organized by Mexico's Central Bank in Mexico City October 14, 2013.

Credit: Reuters/Tomas Bravo

NEW YORK (Reuters) - Mexico's economic growth in the first quarter of the year is being affected by slower growth in the United States and by poor weather, Mexico Central Bank Governor Agustin Carstens said on Friday.

"We have had slower-than-expected growth in the first quarter but I think to a large extent it is also correlated with slower growth in the U.S. and a lot of it is because of the weather," he said, speaking to gathering of The Economic Club of New York.

He also said emerging market nations need to be ready to deal with the consequences of higher interest rates in the United States and other developed nations.

Carstens reiterated to Reuters that the economic growth forecast for 2014 remains between 3 and 4 percent for Latin America's No. 2 economy.

Asked if there was a chance it may come down given the softness in the first quarter economic activity, he deflected the question, saying: "We have to see what the incoming figures tell us. There are some transitory factors effecting growth, such as the weather in the U.S."

"We will revise our forecast in the next inflation report that we will issue in May. So right now we don't have any other figures," he told Reuters after his speech.

On Thursday, Mexico reported factory exports rebounded in February by the most in over four years as auto shipments surged.

Mexico's central bank has held interest rates at a record low of 3.50 percent since early in the fourth quarter of last year..

The government is forecasting economic growth of 3.9 percent this year versus the 1.1 percent growth in 2013 which marked a four-year low due to a downturn in factory output and construction.

Inflation ran above 4 percent earlier this year while the peso has eased off its 1-1/2 year low against the U.S. dollar in January when investors were dumping emerging market assets.

The reduction in U.S. monetary stimulus, known as tapering, has impacted emerging markets negatively.

INSULATION

Much of the extra cash that was pumped into the world's largest economy by the U.S. Federal Reserve sought higher yielding assets in emerging markets versus near zero interest rates in the United States.

Now that the stimulus is being pulled back and interest rates are rising, Carstens believes economic reforms in Mexico have helped insulate the country from the worst of the sell-offs.

The close ties to the U.S. economy have also helped, but that doesn't mean Banco de Mexico won't remain vigilant, he said.

"It will be a turbulent ride. We will have to be prepared and if you do the job I think you will fare well," he said.

"Flexibility in the exchange rate, flexibility in interest rates is important. You need to anchor those variables with strong fundamentals in the fiscal side, on the financial sector side."

He also said having an FCL (Flexible Credit Line), with the International Monetary Fund was also an important factor to prepare for any potential disruptions.

"You have to bring in all the help you can," he said.

"I think the main value of an instrument like the FCL is not so much the money it offers you, but the fact that it is a very, very valuable commitment acknowledgement. If you don' keep to the fundamentals, then the Fund will say you don't have access to that money. That is a scenario you do not want to face."

(Corrects time element to Thursday in seventh paragraph)

(Reporting by Daniel Bases; Editing by Sophie Hares and Stephen Powell)

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