LatinFinance - September/October 2017 - 76

AWARD
CENTRAL
BANK
GOVERNOR

Firm, steady action by Mexico's central bank has helped guide
the country through a fear-filled few months. By Robert Kozak

Resolute path

iving next to an economic giant is not easy. Shocks can be sharp, and implementing monetary policy, complex. Months after the election of a new president in the United
States, which caused tremors south of its border, a sense of normalcy has returned to Mexico,
though, led in good part by the Banco de México and its governor, Agustín Carstens.
Each year, LatinFinance surveys central bank watchers and economists to identify who
has been most effective at managing monetary policy and controlling inflation. This year,
Carstens wins LatinFinance's Central Bank Governor of the Year Award, repeating the top
honor he received in 2015. Other central bankers, especially Ilan Goldfajn from Brazil, also
won praise for their work during the period between July 2016 and June 2017.

environment without any issue as Mexico
started its campaign to increase rates," says
Eugenio J. Alemán, director and senior
economist with Wells Fargo Securities.
Consumer prices had gained 2.13% in
2015 and 3.36% in 2016. But the US election process exacerbated depreciation of
the peso, even as a rise in domestic energy
prices began pushing up the CPI. The result
was an annualized inflation rate which,
through July this year, was 6.44%, its highest
level since 2008. That was well above the
central bank's target rate of 3%, with a band
of plus or minus one percentage point.
Meanwhile, Donald Trump's election
victory in the United States caused a strong
reaction in Mexico. Global corporate and

Source: Banco de Mêxico, Flickr

Why Mexico is special
A series of considerable shock waves buffeted Mexico's economy over the year, including
weakness in the peso following the US elections and an increase in the price of energy. Reverberations sharpened inflationary pressures, which the central bank steadily worked to
dampen.
Indeed, well before those price pressures become apparent, the central bank was working to anchor inflation expectations. "Mexico was subject to a sequence of shocks, and some
of them were not immediately reflected in the inflation
rate," says Carstens, who earned a doctorate in economics from the University of Chicago, and was previously
Mexico's finance minister, among other high-profile
posts. "But we could see that the underlying pressures
were increasing."
Weaker oil prices and lower output of crude oil in
Mexico had spurred a gradual depreciation of the peso
beginning in 2014, offset eventually by some counterbalancing factors, including the price of telecoms.
Once the US Federal Reserve began increasing shortterm interest rates in 2015, Banco de México jumped into
action. Mirroring US actions, Mexico has raised its policy
rate a sharp 400 basis points since then.
"It is a very substantial increase but we thought that
it was necessary to anchor expectations and to assure
that inflation would converge towards our 3% objective
towards the end of 2018," Carstens says. "We have been
quite active in tightening our monetary policy stance."
At Banxico's most recent meeting on August 10, it held
DETERMINED APPROACH: Banxico Governor Agustín Carstens was lauded for his
the rate at 7%.
assertive approach to monetary policy during the external shocks following the US
election
Carstens "has been able to manage a very difficult

76 L ATINFINA NCE.COM - September/October 2017

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