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Guillermo Ortiz, the longest-serving central bank governor in the Americas, is reducing interest rates slower than all his counterparts, and Mexico is paying for it in the currency market.

Ortiz, whose second six-year term at Banco de Mexico ends Dec. 31, will lower the benchmark rate to 7.25 percent today from 7.5 percent, according to the median forecast of 23 analysts surveyed by Bloomberg. When the central bank cut borrowing costs on Feb. 20 by a smaller-than-forecast quarter-point, the peso plunged to a record low within 30 minutes.

While central bank chiefs around the world slash interest rates toward zero to revive growth, Ortiz, 61, is sticking to policies that have defined his career and helped him stabilize the currency after the 1994 devaluation and bring down inflation to a three-decade low. Now investors say the Stanford University- educated economist is too focused on controlling consumer price increases at the expense of growth in an economy that shrank in the fourth quarter for the first time since 2003.

Ortiz and his board “sometimes just get too bogged down in their orthodox stance,” said Joel Martinez, general director of Mexico City-based economic consulting firm Visor Financiero. The February cut, following January’s half-point reduction, “was very mediocre, very small and not aggressive enough,” he said.

Ortiz didn’t respond to telephone calls and a letter seeking comment.

Chile, Brazil

The peso tumbled 24 percent against the dollar in the past six months. It’s posted the worst performance against the dollar of the 16 most-traded currencies even after strengthening 10.4 percent since March 10.

Chile’s peso is the biggest gainer in Latin America this year, advancing 9.4 percent, as its central bank pushed down the benchmark lending rate 6 percentage points to a four-year low of 2.25 percent. Brazil’s real is the second-best performer, rising 2.9 percent, after rate reductions of 1 point in January and 1.5 points last week. The Federal Reserve lowered the benchmark U.S. overnight rate to a range between zero and 0.25 percent in December from 4.25 percent a year earlier.

Declines in exports, migrant remittances, tourism inflows and oil production swelled Mexico’s current account deficit to $6.1 billion in the fourth quarter, the widest trade gap since 2000. The slide in the peso drove annual inflation to 6.2 percent in February from 3.7 percent a year earlier.

‘Balancing Act’

“It’s a very difficult balancing act,” said Neil Dougall, head of emerging-market research at Dresdner Kleinwort in London. “Inflation is a significant concern. Ortiz has done a very good job over a long period of time in terms of bringing a very steady hand to the tiller.”

To try to stem the peso’s decline, Banco de Mexico has spent $20 billion in the currency market since October, driving down the country’s foreign reserves by 5 percent.

Mexico’s peso weakened as much as 1.5 percent on Feb. 20 after Ortiz lowered the rate less than the half-point median estimate in a Bloomberg survey of economists. The peso traded today at 14.0989 per dollar. It touched a record low of 15.5892 on March 9.

Mexico’s Bolsa stock index declined 12.4 percent this year, the worst performance in Latin America. Yields on the government’s benchmark peso bonds due in 2024 have risen 36 basis points, or 0.36 percentage point, to 8.62 percent, according to Banco Santander SA.

18.2 Per Dollar

“The market is not giving the Mexican central bank the benefit of the doubt,” said Alberto Ramos, a Latin America economist with Goldman Sachs Group Inc us fast cash. in New York. Investors are “looking more favorably on central banks that are looking to protect the economy,” he said.

Goldman says the peso will weaken to 14.25 per dollar by June. Societe Generale revised its mid-year estimate March 9 to 16.5 from 11. Rogelio Ramirez de la O, the Mexico City-based economist who predicted the 1994 devaluation, forecasts the peso will fall to 18.2 by year-end. The peso will drop to 14.5 per dollar, according to the median mid-year forecast in a Bloomberg survey of 24 economists.

Ortiz has “always erred on cautious side” even when “the best thing to do is to give the market what it wants,” said Nick Chamie, global head of emerging-markets research at RBC Capital Markets in Toronto.

‘Batman and Robin’

In his four-decade career, Ortiz, a native of Mexico City, served as head of research at Banco de Mexico, executive director at the International Monetary Fund and undersecretary of the Finance Ministry before President Ernesto Zedillo tapped him as finance minister in December 1994.

Days earlier, Zedillo had abandoned a currency peg that kept the peso near 3.4 per dollar. The currency plunged 53 percent before Ortiz managed to stabilize it in March 1995. The jump in inflation to a seven-year high of 52 percent in 1995 prompted Ortiz to rein in spending and then limit money supply growth after Zedillo named him central bank governor in January 1998.

Inflation dropped to 9 percent by 2000, helping the country win investment-grade credit ratings from Moody’s Investors Service that year and Standard & Poor’s in 2002. Inflation fell to 2.9 percent in 2005, the lowest since at least 1974.

Ortiz turned Banco de Mexico into a “staunch inflation fighter,” Federal Reserve Bank of Dallas President Richard Fisher said in a February 2006 speech. He dubbed Ortiz and then- Finance Minister Francisco Gil Diaz “Batman and Robin” — an economic dynamic duo.

Calderon-Ortiz Feud

“He has to take a good amount of the credit,” said Lawrence Krohn, a professor of international economics at Tufts University in Boston. “He’s simply managed the money supply very astutely.”

Ortiz may have underestimated how investors would react to the February rate cut, according to Pablo Cisilino, who manages $8 billion in emerging-market assets at Stone Harbor Asset Management in New York.

“They didn’t communicate what they were doing,” Cisilino said. “They never explained why” and “that scared the market,” he said.

President Felipe Calderon probably won’t reappoint Ortiz when his terms ends in December, Visor Financiero’s Martinez said. A decade ago, Calderon, then president of the opposition National Action Party, unsuccessfully pressured Zedillo to fire Ortiz as central bank governor, saying he had implemented a $61 billion banking industry bailout without proper congressional authorization.

Maximiliano Cortazar, a spokesman for Calderon, said he didn’t know whether the president plans to reappoint Ortiz.

“He knows this is his last year,” said Martinez, who writes a weekly opinion column on financial markets in Reforma newspaper. It’s “been very difficult for Ortiz,” he said.

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Filed under: economics by Forest