MCO Moodys Corp

Bank of Mexico Gov. Agustín Carstens sat down on Friday, Aug. 26, 2016 with Wall Street Journal reporters Jon Hilsenrath and Harriet Torry on the sidelines of the Kansas City Fed's monetary policy research symposium in Jackson Hole, Wyo.

He discussed Mexico's monetary policy and public sector debt, as well as the debate over negative interest rates.

Here is a transcript of the interview, lightly edited for length and clarity.

MR. CARSTENS: We are all very into our own problems, and I think that this year, the topic is very thought-provoking. And I think we're all sort of reflecting a lot of -- on the toolbox of monetary policy. (Laughs.)

MS. TORRY: Well, one of the things that we've both been interested in talking about is negative rates. Of course, this isn't something that is directly affecting you at the moment.

MR. CARSTENS: Yeah.

MS. TORRY: What are your thoughts on negative rates, and how they -- how [they] impact emerging markets?

MR. CARSTENS: Well, I mean, I think something that has been made clear during this -- today's session, and even during -- it was an important part of the message of [Federal Reserve] Chair [Janet] Yellen, was that there are equivalent ways -- (chuckles) -- to get the same, the same result. And you know, (inaudible) negative rates don't seem to be a good idea.

I think that the real relevant thing is that today we're discussing, in a way, pretty much the boundaries of monetary policy -- you know, how far monetary policy can go in terms of promoting economic growth, in terms of returning to a much -- to a normal performance of inflation. And, it has -- it was made clear by Chair Yellen's speech that we didn't have the right toolbox and that we have been in the need to -- I mean, the central banking community, but in particular advanced economies' central banks have been facing the need to -- improvise as events unfold. And I think that that has a lot of value added, I think, that to have the benefit of hindsight and to evaluate, you know, how far can we go with monetary policy and in particular what is the toolbox that is necessary to face even some scenarios that were unthinkable many years ago.

JON HILSENRATH: Coming back to the point about negative rates, what's your assessment, to the extent that you've looked at this, of the costs and benefits of negative rates?

MR. CARSTENS: Well, I mean, I still -- my colleagues, central bank colleagues, have expressed convincing arguments about the net benefits of those measures. I mean, certainly it has been recognized that in some cases, it might affect commercial banks. It might weaken their strength and it can weaken creation. But if you add up all together, we're still not at the point where we have net costs. I sort of -- I mean, I agree with that.

And I also felt that there was a little bit of a pushback in the audience today when extreme negative rates were suggested. (Laughs.)

So, I mean, I think that so far it has worked well, but at the same time I think that prudence is called for as we move forward.

MR. HILSENRATH: But you say it could -- it could hurt commercial bank profits and thus their willingness to lend?

MR. CARSTENS: And you know, commercial banks, I mean, their -- yes, their capacity to lend, yes.

MS. TORRY: I wanted to ask your views on Mexico's efforts to contain its growing public-sector debt. It is 50 % of [gross domestic product] this year, and Moody's and Standard & Poor's have reacted. What are your views on that?

MR. CARSTENS: Well, of course it is important. Just if you -- pretty much the day before Moody's made this ruling, the Ministry of Finance came out with a very detailed analysis on the public finances, offering far more information, putting into perspective the dynamics of public finances in Mexico.

And I see a real desire of the Ministry of Finance to contain, I would say, the growth of public debt over GDP and in a way make this not to be an issue as we move forward.

Certainly, there are some dynamics that are under way that have been affecting the public finances. Some of them have been, for example, the growth in pensions. And at the same time, also, the fall in the price of oil has been very, very, very important. There has been an adjustment. For example, traditionally, oil-related income would finance more than 30 % of expenditures, and lately it has been only 13 %. So that is -- that is a very significant shock.

But it is very, very clear that we need to contain the growth of debt over GDP. And in the coming weeks, on the 8th of September, the federal government has to present its fiscal plan for next year. And my sense is that they will be reassuring in this regard.

MS. TORRY: OK. What is the level of risk you see on how rising debt is contributing to the weakness of the peso?

MR. CARSTENS: Well, I mean, I -- to this -- at this stage, I don't -- I don't sense that that has been a major issue. I think it is -- for some time already -- for some time already, the Mexican government has been taking action, and in a way this was a surprising call by Moody's, no?

At the -- at the beginning of the year, we had some issues related to [state oil company] Pemex and decisive actions were taken. This year, the government reduced its expenditure goals in February, and then also when the Brexit news came out.

So I think that, fiscally, the government has been taking a very precautionary -- has had a precautionary attitude this year. It also has made a very important commitment that is out there, and that is that for the first time since 2009, the Mexican government will have a primary fiscal surplus.

So probably, yes, a little bit what has affected the ratio is that growth has been slower than anticipated, but that also has been the fact that we have seen in terms of global growth. And what has been advocated in fora like the [International Monetary Fund], the G-20 and so on is that you have backed structural reforms and so on, and Mexico has done that.

So I think that sometime soon, I expect that more growth will be seen as a result of -- as a result of the reforms. Also, my sense is that there are expectations for stronger growth in the U.S., and that should help Mexico.

MR. HILSENRAT H: There's also expectations, as Yellen said today, that the Fed is going to raise rates again. Given the slower-than-expected growth in Mexico, the impacts of Fed rate increases on the currency, are you at all -- or how well-positioned is the Mexican economy to rate increases here?

MR. CARSTENS: Well, I mean, this is not a new phenomenon. (Laughs.) This is -- this is something that has been on the table for quite some time. In a way, it precisely shows that the U.S. economy is recovering, the labor market is showing better performance, and so on. And we have mentioned in our -- Banco de Mexico has mentioned in its monetary policy communiqués already for quite some time that one of our most important variables that we will follow in making our decision is the monetary -- the relative monetary policy stance of Mexico vis-à-vis the U.S. So we are prepared, I would say, to react to the situation if we see that the action of the Fed's affects inflation, and the transmission mechanism probably would be the exchange rate.

So if the action that the Fed might take, it has an impact on expected inflation, we will have to tighten monetary policy. So the interest rate differential versus the U.S. is very important, and certainly plays a very important role as we decide our own monetary policy action.

MR. HILSENRATH: So when we've talked about this in the past, it sounded like you were prepared to move when the Fed moved. Is this now a case where you're prepared to see the Fed move and then see how exchange rates respond before making a decision? Or are you committed to going one for one with any Fed action?

MR. CARSTENS: Well, I mean, this is one more of the determinants of inflation. If you see this year, we have had two hikes in addition to what the Fed did. The Fed moved in December of last year. We moved then in parallel. Then we tightened 50 basis -- then we tightened 50 basis points in February and we tightened an additional 50 basis points in the summer, no?

MR. CARSTENS: So, in a way, I mean, that shows that we are not going to wait for Fed actions. Fed actions might trigger some reaction from our side, but we will also respond to other determinants of inflation. It might also be that what we have been seeing in terms of the developments of the exchange rate shows some anticipation of the Fed action. So, you know, if the Fed action is sort of anticipated and is reflected in the market and we see that that doesn't have consequences on inflationary expectations, we might not act. But if that's not the case, we are prepared to act.

MR. HILSENRATH: Right. So I just want to be sure I understand that. It sounds like you're saying that, because you've already moved pretty aggressively two times this year, it might not be the case that you have to act again, even if the Fed does -- that it depends on market response.

MR. CARSTENS: Yeah, yeah. But we have underlined that we will be watching it very carefully. (Laughs.)

(END) Dow Jones Newswires

August 27, 2016 15:20 ET (19:20 GMT)

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