(Bloomberg) -- Mexico's president picked central bank board member Alejandro Diaz de Leon to become the next central bank governor, opting for an orthodox technocrat expected to safeguard the institution's inflation mandate.
Diaz de Leon will begin his governorship on Friday for a term ending on Dec. 2021, according to a statement from President Enrique Pena Nieto. The president will still need to nominate a fifth member of the board, who will require Senate approval. Governor Agustin Carstens is departing to head the Bank for International Settlements.
Diaz de Leon, 47, returned to the central bank earlier this year after a decade hiatus in government and is considered by some economists to be dovish. His appointment came following a cabinet shake up that included the resignation of Finance Minister Jose Antonio Meade to run for president in the election next July and the naming of Pemex chief executive officer Jose Antonio Gonzalez Anaya as his replacement.
Diaz de Leon is "a very solid choice," said Alberto Ramos, Latin America chief economist for Goldman Sachs Group Inc. "He's a very reputable technocrat with a long career trajectory at the central bank."
The peso was little changed at 18.5354 per dollar in Wednesday morning trading in Tokyo. It has strengthened 12 percent this year, the third-best performance among major currencies tracked by Bloomberg worldwide after the euro and the Danish Krone.
Banco de Mexico's new governor has his work cut out for him. The central bank will need to rein in inflation that's just begun to slow from a 16-year high, shore up a currency that's swung violently on trade threats by President Donald Trump and keep a slow-burning economy afloat.
Mexico's economy contracted in the third quarter for the first time in four years after two earthquakes stalled growth in the services sector. But whether the central bank has room to support the economy by keeping rates on hold and eventually cutting them next year, as economists expect, will depend on the behavior of the peso and inflation. Credit Suisse Group AG said that if the U.S. raises rates in December, Mexico may have to follow suit as inflation remains above 6 percent, twice Banxico's 3 percent target.
That decision could be made by the board's four current members, presenting the possibility of a tied two-two vote. But Ramos said he sees that possibility as unlikely for a board where most decisions have been unanimous.
"If they see that there are risks that require a monetary response, I think the entire board will probably follow," he said.
Banxico Career
The hunt for a new central bank chief began almost a year ago when Carstens said in December he'd step down in July, only to put off his departure amid uncertainty caused by threats the U.S. would end the North American Free Trade Agreement. Analysts began to assume that the ruling party's choice for 2018 presidential candidate was holding up the announcement of Carstens's successor as Meade was considered to be on the short list for that post, and if not, for Banxico governor. The ruling PRI party had even changed its bylaws to allow non-members such as Meade to run for president.
On Monday, outgoing governor Carstens warned Mexico's next president that it would be counterproductive to try to change Banco de Mexico's exclusive inflation mandate.
"What has given space for solid autonomy is the fact that people want to have an institution within the state that its only mandate is to keep inflation low and stable," Carstens told Bloomberg News.
Diaz de Leon's decade in government began in 2007, when he launched and headed Mexico's pension fund for public employees. He then led debt issuance at the Finance Ministry, winning recognition for opening Mexico's bond sales to new markets. The graduate from Yale University with a masters in public administration became chief of Mexico's export-import bank in 2015 before taking his post as deputy Banxico governor in January. That marked Diaz de Leon's return to the central bank, where he had worked for 16 years before his sojourn into government.
Diaz de Leon offers significant market experience to the board and is one of its most dovish members, Barclays chief Mexico economist Marco Oviedo said earlier this year. But his challenge to bring inflation back to the 3 percent target means his dovishness would have its limits, Oviedo added.
To contact the reporters on this story: Eric Martin in Mexico City at emartin21@bloomberg.net, Nacha Cattan in Mexico City at ncattan@bloomberg.net.
To contact the editors responsible for this story: Vivianne Rodrigues at vrodrigues3@bloomberg.net, Robert Jameson
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