LatinFinance - September/October 2015 - 111

ments in the exchange rate market."
The tightening of monetary policy in
the US will be the main challenge ahead
for the Mexican authorities, Carstens says.
However, the stronger economic growth in
the US that would trigger rate hikes would
be positive.
"It would probably generate some temporary turbulence in the market but that's
something we are prepared to go through,"
he said. "But a much stronger US economy
will definitely benefit Mexico."
Close race
Rodrigo Vergara, Chile's central bank
governor, came in second place this year.
The Banco Central de Chile has had to walk
a tightrope between feeble growth and
high inflation, which has just retracted to

rising food prices meant the headline rate
was higher.
"More fundamentally, despite the slowing economy, the central bank has persistently hinted that it is unlikely to loosen
monetary policy because of the large current account deficit," says Glossop at Capital
Economics.
"We think that this is a key macro risk that
must be addressed, and it is encouraging
that policymakers appear to be alive to this."
Although inflation is also running above
target in Peru, the Banco Central de Reserva
del Perú, led by Julio Velarde, has resisted
calls to cut borrowing costs to offset the
weakening of the economy. "Peru has a
very aggressive target of 2% which is much
lower than Mexico or other countries in the
region," says Amiel at IHS.

Source: Reuters

could have cut interest rates had they not
been overly concerned about the peso,
which has fallen by 20% against the dollar
over the past year. In August, it was trading
at a record low of 16.99 pesos to the dollar.
"That could have helped to get the economy going this year, when instead it has been
struggling."
Carstens rejects that assertion, saying
the potential for the peso to weaken further
meant the bank needed to take a prudent
approach. "Interest rates are at an all-time
low and in real terms are close to zero, so
there's plenty of impulse for the economy.
We felt the benefits could be eroded if
inflation expectations started creeping up,"
Carstens says.
The direct impact on Mexico's currency
and rates of speculation over imminent
moves in US monetary policy also makes
the country's monetary policy unique to its
Latin American peers.
The bank changed its MPC schedule in
July for the second half of 2015 to ensure it
was better placed to respond to any change
in US monetary policy. The September meeting has moved from September 3 to September 21 to allow it to fall after the US Federal
Reserve's September 17 decision. Similarly,
the MPC now meets the day after the Fed's
October 28 and December 16 meetings.
"The fact that Banxico will now be making its own decisions right after the US Fed
has met suggests that Mexico is fine-tuning
its strategy - and timing - to follow an
eventual rate hike in the US," says Mario
Robles, head of Latin American research at
Commerzbank.
"Banxico is seeking to minimize any
disruption in financial markets by unnecessarily delaying a rate hike because of schedule rigidities, with this measure effectively
helping to prevent such problems."
With 80% of its exports going to the US,
Carstens says Mexico is more integrated
with its northern neighbor than any other
emerging market. "Given that there had
been a month between the meetings of the
Fed and the Banco de México, we wanted to
reduce the gap to reduce uncertainty."
While Mexico is committed to a flexible
exchange rate and against the use of capital
controls, the central bank has accumulated
reserves of almost $200 billion and auctions $200 million of those if the peso falls
by more than 1.5% in a day. "This sharp
accumulation of reserves that we have done
is a very important macro-prudential tool,"
Carstens says. "We have a policy objective
to use reserves to smooth out sharp move-

CLEAR LINE: Banxico governor Agustín
Carstens says open communication is
paramount

the upper bound of the central bank's 2%
to 4% range, after being above target for
more than a year. "The scope for further
monetary policy stimulus is limited as
policymakers come to grips with the fact
that potential growth may be lower than
expected," says Jorge Morgenstern, senior
economist at HSBC.
José Darío Uribe Escobar, governor of
Colombia's central bank, comes in third. He
took this award last year thanks to Banco de
la República's decision to hike interest rates
by a full percentage point in a pre-emptive
move to curb inflationary pressures.
He also received praise this year for
keeping core inflation close to the bank's
target of 3% plus or minus 1% - even though

The Dominican Republic, whose central
bank is led by Héctor Valdez Albizu, also
received praise for its work. The Caribbean
country posted growth of 7.3% in 2014 as
inflation fell sharply to 1.6% from almost 4%
in 2013. "Inflation is really low and it is precisely because they have managed it very
well," says Martínez-Ostos at Barclays.
Brazil was just outside the shortlist for
the award this year, but was praised for the
aggressive stance on monetary policy taken
by Banco Central do Brasil president Alexandre Tombini to combat rising inflation.
"It is not easy, but they've shown determination to hike to whatever is necessary to
bring inflation back within target," says
Alex Wolf, emerging markets economist at
Standard Life Investment referring to rate
increases from 11% to 13.75% over the last 12
months as inflation rose from 6.5% to 8.9%.
"They are acting with independence." LF
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