Analysts and observers praised Mexico’s central bank governor as an architect of macroeconomic and financial stability in his country, a man who skilfully maintained strong support for the new wave of reforms brought by Mexico’s new government.
The Mexican central bank “deserves the honour for their standard monetary policy in a world full of creative monetary policies,” says Rodica Glavan, fund manager, emerging markets fixed income at Insight Investment Management. “By not interfering with the path of the foreign exchange rate, they let the currency, rather than growth, take the hit of economic adjustment (in contrast to other more interventionist countries in the region). They have also correctly looked through the temporary price rises, as inflation has now come back within the target band.”
Inflation in Mexico fell due to easing pressures on agriculture products prices. In July it came within the target range for the first time since February. In September, Banxico cut the overnight interest rate by 25 basis points to 3.75%, surprising many in the markets who had expected it to stand pat after delivering a cut of 50 basis points in March, the first since 2009.
Mario Robles, Commerzbank analyst, says Carstens “has done an extraordinary job handling monetary policy. He has been a very patient man before cutting rates in a very complicated environment. He waited until he deemed it absolutely necessary to cut rates. He didn’t cut rates [before] because it was a very volatile environment. When the rest of the world was cutting rates because they were expecting a very negative scenario, he realized that the implicit monetary conditions in Mexico were going to be relaxed because of a weaker peso. He recognized that the liquidity was going to help Mexico.”
Carstens was very good at handling monetary policy in relative terms, looking at how the global liquidity flowed into Mexico during the Federal Reserve’s quantitative easing policy, Robles adds. “He did a fantastic job adjusting monetary policy in order to reflect that. This has been governor Carstens’ most impressive asset.”
Inflation has remained under control, and at the same time the country had a well-functioning foreign exchange market, without any currency wars being played, says Pablo Goldberg, head of emerging markets research at HSBC. The foreign exchange reserves increased and the central bank did a good job in guiding the markets. “I think they communicated very well to the markets their steps and their reasoning, and that has been very effective in terms of guiding investors,” Goldberg says.
The biggest challenge for Carstens in the year ahead is the fact that foreign ownership of local securities is significant, Robles says. “If there is financial dislocation in the markets, let’s say because something happens in the US, or in Europe, a financial accident, he needs to manage the exit of those capital flows.”
Another area where Carstens could improve things is that of the fees charged by local banks to consumers and companies, which are very high by international standards. “Fees in Mexico are very expensive. If you use your credit card, they charge you a fee; if you go to the ATM, they charge you a fee; if you use more than, say, three cheques a month, they charge you a fee,” says Robles. “If he can continue to bring that to international levels, which are lower, that would have a great benefit for the financial system and for the consumers of financial services. They can promote competition between banks, bring some regulation to allow the banks to be more competitive,” he adds.
Goldberg notes that if the government’s reforms are put forward “in an aggressive manner”, Mexico could see some more foreign money coming in. “And then, how the central bank deals with that will be interesting,” he says. “Inflows are always welcome, but dealing with them is an art.” Governor Carstens did not respond to Emerging Markets’ requests for comment. —Antonia Oprita