Time for rich nations to act on loose policy -Mexico's Carstens

Reuters

By Dave Graham and Luis Rojas

MEXICO CITY, Oct 14 (Reuters) - Rich countries must urgentlytake advantage of looser monetary policy to stabilize theireconomies and stimulate growth, without relying solely oncentral banks, Mexican central bank governor Agustin Carstenssaid on Monday.

He was speaking as lawmakers in the United States haggledover the U.S. debt ceiling while the world's No.1 economy staresdown the barrel of a potentially devastating debt default.

Central bankers in several advanced economies have opened aspace for their governments to implement fiscal, financial andregulatory reforms that should be seized, Carstens told centralbankers from Europe, the Americas and Asia gathered at a forumin Mexico City on Monday.

"It is urgent that the countries most affected by the crisiseffectively use this window of time that the central banks haveoffered," Carstens said. "Monetary policy alone can't solve theproblems economies are suffering from."

President Barack Obama said on Monday there seemed to beprogress in Senate fiscal impasse negotiations but that there isa good chance the United States will default on its debt ifRepublicans are unwilling to set aside some partisan concerns.

Carstens previously said Mexico was well placed to weather aU.S. default, citing $170 billion in Mexican reserves and itsflexible credit line from the International Monetary Fund foruse in an emergency.

"Mexico is well prepared to confront it," Carstens told ElEconomista in an interview published on Sunday evening. "We havetaken due care in the management of international reserves andwe are well provisioned."

"The problem is so serious because the obstacle is politicalin nature, not financial nor economic."

The chief economist at Mexico's finance ministry, ErnestoRevilla, said last week that Mexico's slowing economy could facean "extreme situation" if the United States fails to raise itsdebt ceiling.

RESPONSIBILITY TO THE WORLD

Mexico's economy has stumbled this year due to lowgovernment spending, a drop in construction and slack U.S.demand for local exports. The United States is Mexico's toptrading partner, the destination of about 80 percent of Mexicanexports.

Failure to reach a deal "would be very complicated,particularly if you factor in the Mexican slowdown," GerardoGutierrez Candiani, head of Mexico's Business CoordinationCouncil, told Reuters.

"We hope they understand that their responsibility is notjust to the United States but to the whole world," he added.

Following Mexico's shock economic contraction in the secondquarter and devastating floods last month, the government hasrepeatedly cut back its growth forecast and now expects grossdomestic product to expand by around 1.7 percent this year.

The International Monetary Fund last week said Mexico'sgross domestic product (GDP) would grow 1.2 percent this year,down from the 2.9 percent expansion it forecast in July.

Taking advantage of cooling inflation, Mexico's central bankhas cut its benchmark interest rate twice this year to ahistoric low of 3.75 percent, in a bid to boost sagging growth.

In a separate interview with Excelsior newspaper, Carstenssaid he sees a broader role for the bank than simply managingprice hikes.

"Our duty is not just to (make sure inflation) convergestowards its target, but to do it in the best way possible," he said in the interview published Monday. "If a space opens up,such as a chance to lower a reference rate, we have to takeadvantage of that opportunity," he said.

Data earlier this month showed annual inflation eased inSeptember for the fifth month in a row to an eight-month low of3.39 percent.

The central bank's annual inflation target is 3 percent.

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