New Bank of Mexico Chief: All Options on the Table Ahead of Policy Meeting -- Update

By Juan Montes Features Dow Jones Newswires

The new governor of the Bank of Mexico said Monday that all options are on the table ahead of next week's policy decision, his first at the helm of the bank, as inflation remains above expectations and the U.S. Federal Reserve has hinted at a December rate increase.

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Mexico's central bank has been on hold since June after a prolonged cycle of interest-rate increases that put borrowing costs at 7%, the highest since early 2009.

But Alejandro Díaz de León, in one of his first interviews since taking up the post Friday, made it clear the bank is concerned about the uncertain backdrop.

"We are concerned about what we have seen in the recent months...We are fully aware of the complex backdrop we are facing; inflation has been considerably impacted and it hasn't come down as quickly as expected," he said at the central bank's headquarters in Mexico City.

Mr. Díaz de León said the central bank would be "extremely prudent." He suggested that inflation data for November to be reported later this week and the Fed's December rate decision would be key factors in the bank's policy decision.

Most analysts expect the Bank of Mexico to keep rates unchanged next week, although several say an increase can't be ruled out as annual inflation, currently at 6.6%, remains stubbornly above the 3% target. The Bank of Mexico's policy meeting is Dec. 14.

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Mr. Díaz de León's wooden-paneled office was occupied until last week by Agustín Carstens, who left after nearly eight years to become the head of the Switzerland-based Bank for International Settlements. The ancient maps that had decorated one of the office's walls -- Mr. Carstens was known for being an avid collector -- have been replaced by a large abstract painting in blue and black hues.

The appointment of Mr. Díaz de León, who has been a deputy governor at the bank for the past year, spells continuity of Mr. Carstens's handling of monetary policy and the bank's focus on inflation. Mr. Carstens was Mr. Diaz de León's boss in the 1990s when both were at the central bank as staff officials.

Mr. Díaz de León, a U.S.-educated technocrat with more than 25 years of experience in public service, takes over the bank at a turbulent time. Inflation accelerated in early November to 6.6%, surprising investors and the central bank itself, while the Mexican peso is likely to face bouts of volatility in the coming months as the renegotiation of the North American Free Trade Agreement with the U.S. and Canada enters a critical phase, and Mexico's July presidential election approaches.

Regarding the Nafta talks, Mr. Díaz de León said that "it's difficult to think that all possible scenarios are incorporated in the exchange rate, as the range of possible outcomes is wide," from highly positive to highly negative.

The Bank of Mexico, which is known for its orthodoxy, raised interest rates by 4 percentage points between December 2015 and June of this year. Inflation suffered different shocks, from a weaker peso that pushed up import costs to a 20% rise in gasoline prices at the beginning of the year as the government gradually removed price caps for motor fuels.

Still, Mr. Diaz de León said the bank's goal to have inflation near the 3% target by the end of next year is achievable, assuming the peso remains stable.

Mr. Díaz de León faces the challenge of imprinting his own style on the bank following the departure of Mr. Carstens, who is well known in Mexico and on the international financial stage.

The new governor said the bank is evaluating whether to make public how each one of the five board members votes at policy meetings, a move that could increase the accountability of the bank. Unlike the Fed and some other central banks, the Bank of Mexico doesn't reveal how individual members vote when there is a split decision.

Mr. Díaz de León studied economics at Mexico's private ITAM university, and earned a master's degree in public and private administration from Yale University.

From 2011 to 2015, he was in charge of public credit at the Finance Ministry -- where he managed Mexico's public debt -- under both José Antonio Meade, a former finance minister set to be the ruling party's candidate in next year's election, and Luis Videgaray, currently Mexico's foreign minister.

Those political connections have raised some eyebrows, but Mr. Díaz de León rejected the idea that it could compromise central bank autonomy.

"At the end of the day, it's actions that matter," he said. Those experiences were useful for professional development, "but in no way do they condition my way of evaluating things and taking decisions...I am very clear that my responsibility is to preserve and consolidate and maintain that autonomy that has served Mexico well."

Write to Juan Montes at juan.montes@wsj.com

(END) Dow Jones Newswires

December 04, 2017 15:17 ET (20:17 GMT)