(Adds quote, inflation data, context on interest rates)
MEXICO CITY, Dec 9 (Reuters) - Mexican Central Bank Governor Agustin Carstens on Tuesday said the peso is undervalued and could strengthen, while also noting that policymakers could raise interest rates if currency weakness affects inflation.
Carstens told local radio that the market appeared to have stabilized a bit after the central bank restarted a dollar auction program on Tuesday to help cushion the peso’s slide following a sharp drop to a 2-1/2 year intraday low last week.
The currency closed at it weakest since March 2009 on Monday, according to Reuters data.
“What I can say is that the peso is undervalued at current levels, that is, going forward I think that the peso could strengthen” Carstens said.
The central bank last week held its benchmark interest rate at 3 percent and said inflation should fall to near 3 percent by mid-2015. But policymakers said prolonged peso weakness could affect consumer prices.
“If interest rates in the United States start to rise a lot, that leads to a sustained depreciation of the exchange rate that begins to affect inflation, we have other tools, such as raising interest rates ourselves,” Carstens said in the interview.
Earlier on Tuesday, data showed Mexico’s annual inflation rate cooled in November to 4.18 percent, but was still above the 4 percent ceiling of the central bank’s target. (Reporting by Luis Rojas and Michael O‘Boyle; Editing by Meredith Mazzilli)