These are exciting times for students of central banking policy. The chairman of the US Federal Reserve, Ben Bernanke, has signalled the end of the bank’s asset purchase programme – and the resulting expectation of higher US treasury yields is causing huge flux in the emerging markets. Japanese president Shinzo Abe’s Abenomics, an aggressive form of Keynesian economic policy, is raising expectations of a Japanese resurgence as surely as it is reducing the value of the yen.
In the UK, the new Canadian governor of the Bank of England, Mark Carney, has linked monetary policy to the rate of unemployment, trying to signal forward guidance on how long the bank will maintain its record low interest rates to incentivize the real economy.
Around the world – from Turkey to Brazil – central banks have, for the past few years, been experimenting with widening the scope of monetary policy from inflation targeting – new approaches that combine expectations of future inflation with attempts to spur growth and even target a foreign exchange rate that is seen as desirable.
|The winner of Euromoney’s central bank governor of the year award, Banco de México’s Agustín Carstens|
It is in this context that the most eye-catching policy decision of the winner of Euromoney’s central bank governor of the year award, Agustín Carstens, was, in March, to lower the Banco de México’s interest rate from 4.5% to 4%. It was the first change to interest rates since 2009, and expectations are that it won’t move again until 2014.
The decision to cut the benchmark rate to a record low took many by surprise, but the bank forecast that inflation would start to turn down around mid-year and keep trending lower for the rest of 2013, partly because of weaker growth. This has been borne out: inflation is now at about 3.5% – within the bank’s target range of 3% with a band of one percentage point.
Radical or unorthodox aren’t words used to describe Carstens or the Banco de México. He is only the bank’s third governor since Mexico’s tequila crisis in 1994. His appointment in 2009 was preceded by an 11-year term from Guillermo Ortiz Martínez (1998-2009) and a 15-year term by Miguel Mancera Aguayo (1982-97).
Fiercely independent, the central bank has been true to its inflation-targeting strategy during the long, slow Mexican recovery, which has won the bank credibility and respect – and, more important, a sound economic basis for future growth. Mexico has inflation under control and room for monetary easing if external shocks hit growth. It is this orthodoxy that Carstens embodies.
"I first met him when I worked at the ministry of finance at the public debt office," says Marco Oviedo, chief economist at Barclays in Mexico. "He has done a very good job and gained complete credibility – you can see that in inflation expectations, which are very stable and very close to the target of 3%.
The markets listen to Carstens, and he has been able to manage their expectations. He has signalled very clearly that the central bank will not intervene in the exchange markets and that’s why you see all the capital inflows in Mexico – because investors know that the bank won’t come in with ad hoc taxes or regulations to try to control flows. That transparency works because the exchange rate works as an adjustment variable when things get bad. So far it hasn’t been a source of volatility to the markets: on the contrary, they are now a source of stability."
Carstens joined the Banco de México in the mid-1980s after completing a doctorate in economics at the University of Chicago. He was appointed treasurer before he was 30, effectively responsible for the national reserves.
"I was at the central bank at the end of the early 1980s and Carstens was already a rising star," says Alejandro Valenzuela, CEO of Banorte-Ixe. "You could see by the young person he was then – very knowledgeable – that it is not a surprise to see ‘AC’ become secretary of finance or central bank governor 30 years later."
Carstens stayed at the central bank, rising swiftly through the ranks, until 2003 when he left Mexico to become deputy managing director at the IMF. He returned to Mexico at the end of 2006 to coordinate the economic policy programme of Felipe Calderón, then president-elect. On taking office Calderón appointed Carstens secretary of finance, a position he held until Calderón nominated him as governor of the central bank. Carstens took over from Ortiz in December 2009.
This background makes Carstens’ approach to the management of the central bank a nuanced and effective one, according to Rodrigo Brand De Lara, now chief economist at Santander in Mexico, who worked for Carstens as spokesperson at the ministry of finance. "In terms of policy, Agustín is one of the most capable public servants in Mexico, and he is also recognized all around the world," says Brand.
"He knows the central bank well – he practically grew up there – and I think he has a very interesting point of view. Being minister of finance made him aware of the pressures to create growth in an economy. Now he is at Banco de México, and inflation is the only official concern of the bank, but I think he takes into account that the economy needs to grow and that Mexico is a developing economy and the growth rate has to be higher than we have. That combination of having been responsible for growth, and now responsible for price control, gives an interesting mix to his approach."
Valenzuela agrees that pragmatism is a Carstens hallmark. "He is a person who doesn’t jump to conclusions; he likes to see all the possibilities before reaching a conclusion. He is very thorough. He isn’t at all temperamental; it is easy to have an open discussion with Agustín, even if ultimately he disagrees with you."
Valenzuela says Carstens has also assembled an exceptionally talented group at the levels immediately below him, which has increased even further the regard with which the central bank is held in Mexico. Brand can attest to his management qualities: "He is very demanding. He has a lot of excellent political qualities; he sits at the table with everyone and everyone respects him: politicians from the left, right and centre, entrepreneurs, CFOs and CEOs. From a personal point of view I can say that he never gets tired. He is a workaholic, he has incredible stamina. He never stops and he – yes – he is a demanding, a very demanding, boss.
Brand adds: "Importantly, Agustín has been very active fighting for a place for Mexico in the global arena. He has been very active in putting Mexico’s point of view into the international discussions about public policy in terms of financial regulation or in terms of economic policies."
Valenzuela says it’s not just Mexico that has benefited from Carstens’ international activities. In 2011 Carstens made a bid to become president of the IMF following the resignation of Frenchman Dominique Strauss-Kahn. He lost to Frenchwoman Christine Lagarde, but he successfully opened a debate about Europe’s domination of the presidency of the IMF and the US’s domination of the World Bank presidency, which dates back to the Bretton Woods conference of 1944 and is viewed as dangerously anachronistic by many in the emerging markets.
"I think he knew his chances were low but [with the campaign to become president of the IMF] he did something very good," says Valenzuela. "His drive was a very important step for the emerging markets. Over time, people will be grateful for him having done this – he’s broken the ice by being the one to say that we need change."