Bloomberg News

Carstens Says Mexico Neutral Rate Lower Than Before Crisis

June 02, 2011

(Adds Carstens comment in eighth paragraph.)

June 2 (Bloomberg) -- Mexico’s economic fundamentals are strengthening and the central bank probably won’t have to increase interest rates to the level they were before the 2008 financial crisis, central bank Governor Agustin Carstens said.

“In a steady state interest rates would be lower than they were pre-crisis because the country risk has come down,” Carstens said in an interview in Sao Paulo today. “This is a result of hard work for many years.”

Mexico is the only major Latin American economy that hasn’t raised interest rates this year. Mexico’s annual inflation rate -- which rose to 3.36 percent in April, up from a five-year low of 3.04 percent in March -- is about half the 6.51 percent recorded in Brazil, the region’s largest economy.

The Bank of Mexico has lowered its benchmark interest rate to a record low of 4.5 percent from 8.25 percent since the bankruptcy of Lehman Brothers Holdings Inc. in September 2008 caused a global financial crisis that prompted central banks around the world to stimulate their economies.

In its last meeting May 27, the bank kept its benchmark interest rate unchanged for a 19th straight meeting. A quarterly inflation report on May 11 showed policy makers kept their 2011 inflation forecast unchanged at 2 percent to 4 percent while raising their growth estimate to 4 percent to 5 percent.

Brazil raised interest rates to 12 percent in policy makers’ last meeting in April, the third increase this year.

Mexico’s credit rating was reduced one level to BBB by Standard & Poor’s in December 2009 after tumbling oil output and the worst recession since the 1930s swelled the budget deficit.

Carstens said the central bank’s board anticipates Mexican inflation will meet forecasts, adding that some economists are reducing estimates.

“We have low inflation, strong public finances, relatively small debt to GDP, record high international reserves, exports are growing very fast,” he said. “Mexico is in a good position right now.”

--Editor: Harry Maurer

To contact the reporters on this story: Adriana Arai in Sao Paulo at aarai1@bloomberg.net; Katerina Petroff in Sao Paulo at kpetroff@bloomberg.net

To contact the editor responsible for this story: Joshua Goodman at jgoodman19@bloomberg.net


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