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 AG. “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. Policy makers have said the inflation impact from peso weakness so far has been limited to prices for durable goods, partly because the economy remains too weak to pressure broader prices.
But policy makers who expect growth to pick up have said they’re watching for signs that the peso is spurring faster price increases and will act to ensure inflation remains at its 3 percent target.