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Carstens Says He Didn’t Signal Mexico Rate Cut on April 29 (1)

May 02, 2013

Mexico’s central bank Governor Agustin Carstens said he was misunderstood by investors who earlier this week interpreted his comments on interest rates as a sign policy makers may cut borrowing costs in the second half of the year.

“The market, or the interpretation that was given to my comment, was that I was in some way prejudging a movement on interest rates,” Carstens told reporters today in Mexico City. “That wasn’t my intention.”

Carstens told Radio Formula on April 29 that policy makers may consider reducing borrowing costs if the annual inflation rate falls below 4 percent from 4.72 percent in early April. The peso weakened after that statement, and fixed-rate government peso bond yields plunged to record lows the next day. Today, the peso rose as much as 0.3 percent after Carstens said policy makers aren’t indicating any bias on future interest rate moves, and strengthened 0.2 percent as of 2:47 p.m. in Mexico City to 12.1779 per dollar.

After cutting its benchmark interest rate in March for the first time since 2009, the central bank kept the overnight rate unchanged at 4 percent on April 26. Policy makers’ statement accompanying last month’s decision made no direct mention of a possible rate move.

The market will keep pricing in a rate cut for the second half of the year, even after Carstens’ comments, said Alejandro Padilla, a strategist at Grupo Financiero Banorte SAB.

Adverse weather conditions and other factors that pushed inflation above the central bank’s target range are expected to be temporary, Carstens said in the April 29 Radio Formula interview. He also said that day that inflation should slow to within the 2 percent to 4 percent target range in the second half of the year.

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