July 1, 2016 / 2:47 AM / 2 years ago

UPDATE 1-Carstens says Mexico cannot 'passively' follow Fed on policy

(Adds quotes, details on inflation and gasoline prices)

MEXICO CITY, June 30 (Reuters) - Mexico’s monetary policy cannot “passively” follow the decisions of the U.S. Federal Reserve, Central Bank Governor Agustin Carstens said on Thursday after raising the policy interest rate more than expected earlier on Thursday to support the peso.

Banco de Mexico raised its overnight rate by half a percentage point to 4.25 percent, above the 25 basis-point hike projected by the median of analysts surveyed by Reuters.

“We can’t passively follow the policy of the Federal Reserve,” Carstens told local broadcaster Radio Formula, emphasizing the United States’ status as a refuge for risk-averse investors.

The Federal Reserve set aside a possible rate hike earlier this month, and many analysts now expect the Fed will keep rates on hold until late this year, if not longer.

Earlier on Thursday, the Mexican central bank said the balance of risks for both inflation and economic growth had deteriorated, even though the inflation outlook was congruent with its 3 percent target.

The central bank’s interest rate hike aimed to calm fears that that currency weakness could inflame inflation.

But Carstens noted that Mexico’s inflation rate could end the year above the bank’s 3 percent target due to gasoline price hikes determined by the government.

Mexico’s finance ministry announced higher fuel prices for July earlier this week and it could further boost prices at the pump in the months ahead.

“We are seeing a very gradual upward trend on inflation due to the adjustment in gasoline (prices) which by the end of the year could push the year’s average (inflation rate) above 3 (percent),” said Carstens. (Reporting by David Alire Garcia and Lizbeth Diaz; Editing by Stephen Coates)

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