Carstens Says Peso Has Room to Advance After Brexit Tumble

(Bloomberg) -- Mexico's peso has room to appreciate after overreacting to the U.K.'s surprise vote to leave the European Union, central bank Governor Agustin Carstens said.

While Mexico's free-floating exchange rate enables the currency to adjust to external shocks, many models suggest the peso is undervalued, Carstens said in an interview with El Financiero Bloomberg TV Friday. The currency fell as much as 6.6 percent last Friday, touching a record low.

Speaking a day after Banco de Mexico raised its key interest rate by a half point to 4.25 percent, more than forecast by economists, Carstens said the bank wanted to be prudent with its increase, rather than risk doing less than was needed. The peso, often used as a proxy for risk in other markets, was caught up in the Brexit sell-off that saw stocks plunge across the globe. While the currency has rebounded in the past few days, it is still down 6.3 percent this year, the most among major currencies after the British pound.

"I think that to a certain degree the exchange rate overreacted to the news and there's space for it to appreciate," Carstens said. For the peso to strengthen, “we need to maintain solid economic fundamentals. That's what the central bank is trying to do."

The bank has room to deviate from the Federal Reserve's path in order to meet its inflation goal, Carstens added. Thursday was the second time this year that Mexico has veered from the Fed's path of keeping rates on hold. Banco de Mexico said that the growth outlook has deteriorated and that worsened global economic conditions could impact prices.

"The same phenomenon can affect differently the outlook for inflation in the U.S. and Mexico, so we can't follow a blind rule" for Mexico's monetary policy relative to the Fed, Carstens said.

Mexico in February raised the key rate between scheduled decisions in a move coordinated with the Finance Ministry, which announced spending cuts. The U.S. last raised interest rates in December.

To contact the reporter on this story: Eric Martin in Mexico City at emartin21@bloomberg.net. To contact the editors responsible for this story: Vivianne Rodrigues at vrodrigues3@bloomberg.net, Philip Sanders