Bloomberg News

Carstens Watchful for Impact of Mexico’s Worst Drought on Record

January 31, 2012

Jan. 30 (Bloomberg) -- Mexico’s worst drought on record is pushing up food costs and may hamper the country’s efforts to keep inflation expectations in check, central bank Governor Agustin Carstens said.

“We have had a very severe drought in Mexico and that has affected some agricultural prices,” Carstens said in an interview Jan. 28 from the World Economic Forum in Davos, Switzerland. “We need to be watchful so that those relative price adjustments do not have secondary-order effects on inflationary expectations.”

Inflation has accelerated for three consecutive months as the drought in the country’s north sparks price increases in produce including corn, tomatoes to beans. An appreciation in the peso so far this year will help keep inflation within a range of 3 percent to 4 percent in 2012, Carstens told reporters on Jan. 27.

The drought, which President Felipe Calderon said Dec. 14 was the worst on record, is crimping grain crops and fueling concerns of shortages of food and water supplies in some areas. Mexico is spending about 34 billion pesos ($2.63 billion) to help communities and farmers deal with the lack of rainfall, the interior ministry said this week.

Strength in Mexico’s economy will “anchor” the value of the peso, Carstens said Jan. 28. Mexico and other emerging countries may be affected if the debt crisis in Europe deepens, he said.

“Mexico has good foundations to navigate through these turbulent waters,” he said.

European Debt Crisis

Europe must make an “important contribution” to the International Monetary Fund to ease the debt crisis, Carstens said. The IMF needs additional funds to deal with the consequences of the crisis for other countries outside of the region, he said.

“Europe plays such an important part in the world economy that to have Europe not on the right path can affect growth prospects, trade, and investment in many other countries and in particular in the emerging market economies,” he said.

Emerging countries will be “more than willing to participate” in delivering funds to the IMF and to avert a wider crisis, Carstens said.

Mexican policy makers have pushed for greater support for the fund through its current presidency of the Group of 20.

Carstens, 53, competed against Christine Lagarde for the top post at the IMF in May. Although he lost, he won support from some emerging market governments in his effort to break Europe’s hold over the IMF’s leadership.

A former IMF deputy managing director, he was named by The Banker magazine in December as central bank governor of the year.

--With assistance from Nacha Cattan in Mexico City and Jana Randow in Davos. Editors: Sylvia Wier, Philip Sanders

To contact the reporters on this story: Matt Craze in Santiago at mcraze@bloomberg.net; Nacha Cattan in Mexico City at ncattan@bloomberg.net.

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


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