(Rewrites throughout; adds Carstens quote and byline)
By Michael O'Boyle
MEXICO CITY Dec 10 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
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
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
"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)