By Eric Martin / Bloomberg
The battle being waged by Agustin Carstens to revive Mexico’s sluggish economy is at risk of being derailed by an unlikely adversary: the peso.
Carstens is set to deliver Banco de Mexico’s quarterly report on Wednesday, highlighting how inflation at a four-decade low and weak growth argue for leaving borrowing costs at their record-low 3 percent.
Yet in a nation where millions remember the chaos that wiped out personal savings during a peso crisis in 1994, the currency’s 19 percent plunge in the past year, in addition to the looming Federal Reserve liftoff, will require higher rates in order to maintain financial stability, analysts said.
Policy makers have started to spend international reserves to bolster the currency, and Carstens conceded to the Wall Street Journal that the central bank may have to raise rates before the next scheduled decision in September if volatility increases.
“If it weren’t for the Fed and the peso, the central bank probably would not be in a rush to hike rates,” said Rafael de la Fuente, chief economist for Latin America at UBS. “Clearly the peso is an issue, and financial stability is very important to them.”
Investors are now looking to Carstens to provide details on how the central bank will manage to stabilize the currency without choking growth.