Mexico inflation at 16-1/2 year high, seen pressuring central bank

MEXICO CITY (Reuters) - Mexico's annual inflation rate climbed to a 16-1/2 year high in 2017, piling pressure on the central bank and its new governor to act again next month to rein in inflation after hiking borrowing costs at the December monetary policy meeting.

Inflation stood at 6.77 percent in the year to December, the highest annual rate since the 12 months to May 2001, according to data published on Tuesday by the national statistics agency.

That was slightly higher than a Reuters poll of economists that expected inflation at year-end to accelerate to 6.75 percent from 6.63 percent in November.

Inflation surged after the liberalization of gasoline prices at the start of last year, though governor Alejandro Diaz de Leon said on Sunday the rate should slow in January as that factor fades from the consumer price index.

The rise in inflation for Latin America's second-biggest economy "will probably lead to further calls for Banxico to raise rates again," at its next policy meeting, Edward Glossop, Latin America economist at London-based Capital Economics, said in a note to clients.

Banco de Mexico (Banxico) is next due to decide monetary policy on Feb. 8.

Minutes from the Dec. 14 meeting reinforced a more hawkish tone under new boss Diaz de Leon, with some board members saying further rate increases may be needed to contain price pressures.

The volatile peso, a likely deterioration of inflation expectations, and risks to the economy associated with the renegotiation of the North American Free Trade Agreement (NAFTA) as well as a presidential election in Mexico this year make a rate hike next month "a significant probability," said Goldman Sachs (NYSE:GS) economist Alberto Ramos.

Yields on Mexican interest rate swaps ticked higher after the inflation data as investors firmed bets on another 25 basis points interest rate hike in February.

Ramos predicted a hike to 7.50 percent at the bank's February meeting, following the December one-quarter percentage point increase to 7.25 percent - unless the next inflation reading was positive or the next round of NAFTA negotiations have a peso-supporting outcome.

Consumer prices rose 0.59 percent in December, a six-year high for that month, according to non-seasonally adjusted figures.

The core index, which strips out some volatile food and energy prices, rose 0.42 percent during the month .

Mexico's central bank targets inflation of 3 percent. Its board said recently it expects the rate to reach that goal slower than it had previously predicted.