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UPDATE 1-Mexico central banker: capital flow defenses may fall short
June 26, 2013 / 4:46 PM / 4 years ago

UPDATE 1-Mexico central banker: capital flow defenses may fall short

MEXICO CITY, June 26 (Reuters) - Mexico’s defenses against fluctuations in capital flows might fall short given the recent shift in global market sentiment, Banco de Mexico board member Manuel Sanchez said on Wednesday.

In a presentation delivered in Switzerland, Sanchez said capital inflows to Mexico had been high but booms often ended in a sudden stop, for example due to expectations for tighter monetary conditions in advanced economies.

The Mexican peso has lost more than 10 percent since speculation began in May that the U.S. Federal Reserve might start unwinding its stimulus.

Losses accelerated after Fed Chairman Ben Bernanke last week laid out a roadmap to slow the pace of the U.S. central bank’s bond buying, a program that has fueled investor appetite for emerging market assets like Mexico‘s.

Sanchez said although Mexican markets had so far adjusted in an orderly way to the change in market mood, with foreign holdings of local debt remaining high, officials had to remain alert.

Policy measures, including high international reserves, a flexible credit line with the International Monetary Fund and strict rules for bank capital, had so far been aimed at blunting the impact of high inflows, he said.

“Such policies can hardly be sufficient; hence authorities should remain vigilant,” Sanchez said, according to slides prepared for the speech.

Markets have speculated that Mexico might start auctioning dollars in a bid to counter sharp moves in the peso, a mechanism it has used before during periods of peso volatility.

Mexico’s economy is closely linked to that of the United States and has been going through a soft patch in the first months of 2013, prompting the government to cut growth estimates to 3.1 percent.

But Sanchez said softening economic activity and rising inflation were expected to be transitory, and leading indicators such as the Purchasing Managers Index suggested economic performance may improve in the near future.

Inflation, which had been on the rise this year, cooled more than expected in early June, backing central bank forecasts for tamer prices in the second half of the year.

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