MEXICO CITY—Expectations that the U.S. Federal Reserve
will raise interest rates soon has hurt currencies across emerging
markets, from the Indian rupee to the Brazilian real. But for
Mexico's central-bank chief, Agustin Carstens, the selloff in the
peso is overdone.
"I think there has been an overreaction in the market," said the
Bank of Mexico governor in an interview on Friday in his
wood-paneled office in Mexico City. The peso has depreciated 16%
against the U.S. dollar in the past year.
The peso, the world's most-traded emerging-market currency, has
been trading at its weakest level since the financial crisis of
2009, and closed Friday in Mexico City trading at 15.29 to the
dollar.
While higher returns in the U.S. make currencies elsewhere less
attractive to investors, Mexico's central-bank chief says that
misses a key point when it comes to Mexico: Higher rates in the
U.S. mean the economy there is on more solid footing, which helps
Mexican exports north of the border.
"Before, when there was good data in the U.S., the peso would
appreciate because it led to expectations of greater consumption,
greater income, more exports," Mr. Carstens said.
"Now, what happens is the market takes it as good news that will
hasten the Fed liftoff, and so they speed up their portfolio
adjustments, and the peso weakens. It doesn't make much sense," he
added.
Mr. Carstens was confident that volatility related to the Fed's
first interest-rate increase—which many investors believe
could occur in September—will be temporary. Once the
market adapts completely to the prospect of higher rates, the
previous logic of what is good for the U.S. is good for Mexico
should return, he said. "I think the peso has a chance to
appreciate ahead."
The central-bank chief said he is "moderately optimistic" about
the U.S. economy, despite weak growth during the first part of the
year. He admits he is a bit mystified over why nonfinancial
companies aren't investing more of their cash but said he thinks
that will improve as the economy picks up.
Despite a sluggish Mexican economy, Mr. Carstens has ruled out
any cut in domestic interest rates, which stand at a record low of
3%. "If we let inflation and the peso go adrift, that will result
at the end of the day in much higher interest rates that would cost
more to the Mexican economy," he said.
But at the same time, he said the bank was likely to wait to see
any uptick in inflation expectations before making any move to
raise interest rates ahead of the Fed. So far, he said there has
been no pressure from demand on inflation, which stood around 2.9%
in mid-May, close to the bank's permanent 3% target.
"We all agree that our main guideline should be inflation
expectations," said Mr. Carstens. "If they start to be affected,
and that happens before the Fed moves, we will act. That appears
not be the case, and by postponing the raise, we are boosting the
economy."
Mr. Carstens, named in February as chairman of the policy
advisory committee of the International Monetary Fund, took the
helm of the bank in early 2010, when the Mexican economy was
rebounding after the financial crisis.
Seven years after the Great Recession, Mexican policy makers
face another difficult environment: low oil prices, low growth and
a weak peso. The recent drop in oil prices forced the Mexican
government to cut $8.3 billion in spending to protect public
finances. Oil accounts for a third of the federal budget.
"What's important here is that the Finance Ministry sticks to
its promises" of budget cuts, Mr. Carstens said. "In the coming
years, to obtain financing will be more difficult as markets will
tighten."
Mr. Carstens praised the structural reforms driven by President
Enrique Peña Nieto's government to end the state oil
monopoly and increase competition in telecommunications.
Particularly, the telecom overhaul has led to lower prices, he
said.
But he said the key was implementation. "It's always more
difficult to implement these things than one may think."
Mr. Carstens aspired to lead the IMF in 2011. Back then, he lost
to then French Finance Minister Christine Lagarde. In 2016, both
Mr. Carstens and Ms. Lagarde end their terms.
When asked if he wanted to continue or not as Bank of Mexico's
governor, Mr. Carstens smiled: "One always wants many things."
Write to Juan Montes at juan.montes@wsj.com and Anthony Harrup
at anthony.harrup@wsj.com
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