January 29, 2014 / 9:37 PM / 4 years ago

Mexico central bank weighs if price spike merits policy shift: Carstens

MEXICO CITY (Reuters) - Mexico’s central bank is weighing whether monetary policy needs adjusting after a spike in inflation, but price pressures should recede this year without higher rates, bank governor Agustin Carstens said in an interview published on Wednesday.

Mexico's Central Bank Governor Agustin Carstens attends a forum organised by Mexico's Central Bank in Mexico City October 15, 2013. REUTERS/Tomas Bravo

Annual inflation in early January shot up to 4.63 percent, well above the central bank’s limit of 4 percent. However, policymakers have argued the surge will be temporary since it is mostly due to the one-time impact of new taxes.

“We are going to have inflation above our range for some months,” Carstens told Web site Arena Publica in a video interview posted on Wednesday.

“We are thinking, and it is an important issue which will be discussed at the monetary policy meeting ... about how long this increase will last, whether it will become generalized or whether it will require an adjustment in the monetary stance,” Carstens said.

Policymakers issue their next rate decision on Friday. The interview was carried out last week. Policymakers generally avoid making any comments during the week ahead of scheduled monetary policy statements.

Analysts in a Reuters poll last week unanimously forecast the bank would keep its benchmark interest rate steady at 3.5 percent as policymakers look to support an economic recovery.

Aggressive interest rate hikes by Turkey and South Africa on Wednesday pushed investors to bet that Mexico could also raise interest rates from a record low by the middle of this year.

Yields on short-term interest rate swaps rose sharply on Wednesday, with the yield on the 2-year tenor bidding 12 basis points higher - on track to post its biggest one-day jump in three months.

Mexico’s central bank lowered borrowing costs in September and October after an economic contraction in the second quarter and policymakers have been expected to keep borrowing costs steady amid a tepid recovery in U.S. demand for Mexican exports.

Preliminary data shows some food prices are higher than they should be, Carstens said, suggesting that was unexpected.

Other factors stoking inflation were higher public transport prices and fiscal reform. The recently enacted reform raised value-added taxes on soft drinks and junk food.

He said he expected the food prices to correct during the year, while other prices linked to fiscal policy would correct within a year and he suggested a rate hike would not help correct current price pressures.

In the Reuters poll last week, the median of analysts surveyed projected the central bank will raise its benchmark rate to 3.75 percent in the first quarter of 2015, pushing back expectations for a hike in the second half of this year in the previous poll.

Writing by Simon Gardner; Editing by W Simon and James Dalgleish

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