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 Business News | October 2007 
Mexico Hikes Interest Rate as Food Inflation Looms
 Noel Randewich & Jason Lange - Reuters
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Mexico City - Mexico's central bank on Friday unexpectedly raised its key interest rate for the first time in six months to dodge a potential spike in inflation caused by high global food prices.
The bank said pressures on food prices have increased more than expected, forcing it to bump up the overnight lending rate by a quarter percentage point to 7.50 percent.
It said it does not expect annual inflation to reach its 3 percent goal until the end of 2009, a year later than previously forecast.
Most economists in a Reuters poll had predicted the central bank would hold rates steady.
The peso rallied 0.89 percent to 10.734 per dollar, its strongest since July, before worries about a world credit crisis slammed emerging market currencies.
Higher interest rates help draw yield-hungry investors into Mexico's bond and currency markets.
The bank said its rate hike was meant to keep higher food costs from sparking more widespread price increases and also to reduce inflation expectations.
"The board will remain attentive to the development of the balance of risks with respect to the revised forecasts, with an eye to reaching the goal," the bank said in its statement.
Rising dairy and grain prices have stoked inflation across Latin America and in many parts of the world. Fast-developing countries like India and China are demanding more food and much grain is being diverted for use in biofuel.
FOOD PRICES WEIGH
Mexico's annual inflation rate fell to 3.79 percent in September, its lowest in over a year, but most economists see food costs adding to inflation in coming months.
The central bank said the impact of a gasoline price hike set for next year would be one-off. It said it was concerned about food costs spreading to other products and pointed out that cigarette prices have recently risen.
The central bank is due to release its third-quarter inflation review on Wednesday, and it said it would then release its inflation forecasts for the next two years.
"Clearly their forecast must have revised upward their inflation forecast," said Lehman Brothers analyst John Welch in a report.
The central bank last raised rates in April on concerns over food prices and has since kept a restrictive bias.
"Food prices are a big factor and everyone knows it, and they are likely already pushing up other prices," said Jonathan Heath, chief economist for Mexico at HSBC.
The central bank also said it has become more likely that problems in the U.S. subprime lending market will lead to weakness in the U.S. economy, hurting Mexican economic growth.
Mexico's government reported on Friday the economy expanded a greater-than-expected 4.4 percent in August, year over year, led by growth in agriculture and despite weakness in industry. |
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