January 29, 2010 / 4:06 PM / in 8 years

Mexico's Cordero: likely to increase FX reserves

DAVOS, Switzerland (Reuters) - Mexico is highly likely to push ahead with plans to buy more U.S. dollars to increase the country’s international reserves, Finance Minister Ernesto Cordero said on Friday.

In an interview with Reuters, Cordero said the finance ministry was inclined to back a proposal from Mexico’s central bank to increase currency buffers.

“That’s an idea we are exploring, we are considering different scenarios about that,” he said on the sidelines of the annual meeting of the World Economic Forum.

“There’s a high probability that we decide to increase international reserves and gradually phase out from the flexible credit line from the IMF (International Monetary Fund).”

Cordero also said he was planning to accept an offer to sit in as an observer on central bank rate meetings.

Central bank chief Augustin Carstens proposed the reserves plan on Wednesday, saying improved market conditions made it a good time to accumulate reserves.

Mexico holds $91.2 billion in reserves, near a record high. While it was most focused on dollar purchases, Cordero did not rule out buying other currencies such as the euro.

“Basically it is to buy dollars in the market,” he said. “Mostly we are concerned about dollars, certainly we are open to consider different alternatives.”

Cordero also said he was concerned that a sudden inflow of capital could put upwards pressure on the peso.

“That’s going to have an impact on the competitiveness of the economy so we are following very closely the inflows to Mexico,” he said.

BOARD SEAT

Cordero said he would accept the offer of a non-voting central bank board seat from Carstens, who left the finance ministry for the central bank at the start of the year, denying this would infringe on its independence.

“It’s only one opinion with no vote on a board of five members so there shouldn’t be any concern about that,” he said.

Investors are wary of signs of government intervention in central bank decisions, especially given the temptation to let rapid inflation erode high public debt.

Argentina sacked central bank governor Martin Redrado after he opposed plans to use international reserves to repay debt, sparking a legal stand-off.

Cordero stressed the central bank was autonomous but said he saw no need to raise rates this year and welcomed the U.S. Federal Reserve’s decision this week to keep rates low.

“I hope that we keep with ... low rates for Mexico right now,” he said. “Certainly that’s the position of the ministry of finance ... that’s a decision of the central bank so we will be very respectful, but that’s our suggestion.”

Mexico’s central bank left overnight interest rates at a six-year low of 4.50 this month, saying weak growth would dampen the inflationary effects of recent tax hikes.

But the bank warned it could raise borrowing costs if new tariffs fuel more inflation than policymakers are expecting.

Cordero said the official forecast of 5 percent inflation this year -- from 3.6 percent in 2009 -- took the tax rises into account and he did not see any risks.

On economic growth, he was comfortable with a forecast of just over 3 percent for 2010 although he noted international institutions expected expansion in the range of 4-4.5 percent.

“Probably Mexico will be growing at least 3 percent this year,” he said.

Reporting by Krista Hughes

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