December 1, 2017 / 5:12 PM / in 14 days

UPDATE 1-Mexico central bank chief sees inflation falling, barring peso shocks

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MEXICO CITY, Dec 1 (Reuters) - Mexico’s new central bank chief Alejandro Diaz de Leon on Friday said inflation should converge toward policymakers’ 3 percent target next year if the peso does not see any big losses.

Mexico’s inflation rate was seen ending the year at 6.50 percent, according to a central bank poll published on Friday. That would be close to a 16-year high seen earlier this year.

Inflation is expected to cool sharply early next year as the impact of gasoline price hikes early this year fades, but analysts are concerned a further slump in Mexico’s peso could boost consumer prices due to higher import prices.

“If we see a scenario where the exchange rate remains orderly without big jumps ... we will see a convergence toward 3 percent,” Diaz de Leon said in an interview with local radio.

Mexico’s peso weakened sharply in October due to concerns that U.S. President Donald Trump could move to end the nearly 24-year-old North American Free Trade Agreement (NAFTA) that has underpinned Mexican export growth.

The market has tilted toward bets on further interest rate hikes by Mexico early next year amid concerns an end to NAFTA could sink the peso.

Diaz de Leon said that investors had been quick to factor in the outlook for the talks between the United States, Mexico and Canada. He said the bank would maintain a “prudent” stance due to the risks to the inflation outlook.

The 47-year-old economist and former finance ministry official was nominated this week by President Enrique Pena Nieto to replace Agustin Carstens at the helm of the central bank. Diaz de Leon officially took over on Friday.

In an interview with Reuters on Tuesday, Diaz de Leon warned inflation may not fall as forecast because of recent and future shocks, laying out a cautious stance that suggests the bank will hold interest rates steady or even hike them. (Reporting by Michael O‘Boyle; Editing by Chizu Nomiyama and Phil Berlowitz)

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