By Anthony Esposito and Sharay Angulo
MEXICO CITY (Reuters) - Mexico's central bank chief Alejandro Diaz de Leon said on Wednesday that he is concerned that energy prices could rise in coming months, making it harder to bring inflation down toward the 3 percent target.
"There could be additional pressure from international energy prices. This is clearly a factor of risk and concern," Governor Diaz de Leon told Reuters in an interview.
The Bank of Mexico has already tempered expectations for inflation to moderate on the back of higher-than-expected increases in prices for energy-related products, such as gasoline and gas.
"We must be very vigilant to see if the trajectory of inflation is consistent with the forecasts and trajectory that were expected, or if the shocks we are seeing begin to have a greater impact on this convergence trajectory," the governor said.
The bank held interest rates steady at its Oct. 4 meeting, though one board member called for a 25-basis points hike and the board cautioned that it may need to raise rates again to counter the risk of persistently high inflation.
Mexico's annual inflation rate rose in September to 5.02 percent. The closely watched annual core inflation rate, which strips out some volatile food and energy prices, was up more than expected at 3.67 percent in September.
Private analysts forecast headline inflation ending 2018 at 4.5 percent and 2019 at 3.7 percent, well above the bank's 3 percent target.
REVAMPED TRADE DEAL REDUCES UNCERTAINTY
Following over a year of heated talks, the United States, Mexico and Canada recently struck deals to replace the North American Free Trade Agreement, rescuing a $1.2 trillion open-trade zone that had been on the verge of collapse.
De Leon said the new trade deal had lifted a shroud of uncertainty that weighed on Mexico's economy, and could help boost activity and have a positive impact on future investments.
"For the exchange rate it also creates a situation of reduced uncertainty and this in some way or another could reduce" volatility for the peso, he added.
"I think the performance of the exchange rate in Mexico compared to other emerging markets over the last months has been favourable and that reflects some of the elements of reduced uncertainty."
Still, Diaz de Leon pointed to the U.S. Federal Reserve's interest rate hikes as a risk for the peso.
"It's a factor that in recent weeks has pressured various emerging market currencies, has led to reduced appetite for risk and even led to capital outflows in some countries ... (it) could also pressure the peso."
(Reporting by Anthony Esposito & Sharay Angulo; Editing by Simon Cameron-Moore)
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Updated Date: Oct 19, 2018 07:05 AM