| | |  Business News | July 2008 
Mexico Central Bank Raises Rate on Inflation Concerns
 Jens Erik Gould - Bloomberg
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| | Governor of Mexico's Central Bank Guillermo Ortiz speaks at the Reuters Latin America Investment Summit in Mexico City March 31, 2008. (Reuters)
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Mexico's central bank raised its benchmark interest rate for the second straight month to curb the highest inflation rate in more than three years.
The bank's five-member board, led by Governor Guillermo Ortiz, increased the key lending rate by a quarter percentage point to 8 percent today, the highest since December 2005. The decision matched the forecast of 21 of 28 economists surveyed by Bloomberg. Seven analysts said the rate would stay unchanged.
The central bank said price risks have worsened and will force it to raise its inflation forecast by an average of about half a percentage point in its quarterly report on July 30. The inflation rate in Latin America's second-biggest economy has risen for five straight months, the longest bout of rising consumer prices since 2004.
"It is indispensable to keep inflation expectations well anchored," the bank said. "Monetary policy plays a fundamental role in this."
Policy makers were forced to raise borrowing costs because annual inflation exceeds the bank's target of no more than 4 percent, said Fernando Losada, Latin America economist for Deutsche Bank Securities in New York. The bank is likely to increase rates again in coming months, he said.
"Banco de Mexico has credibility to defend," Losada said before the report. "Twenty-five basis points is a move in the right direction, but it's not the shot that will kill the enemy. The central bank has work to do ahead."
`Very Strong'
The bank surprised analysts last month by raising borrowing costs for the first time in eight months. The bank said then that inflation may exceed its forecast for the rest of this year and in the beginning of 2009.
Consumer prices rose 5.26 percent in June, the first month that annual inflation exceeded the bank's forecast of no more than 5 percent in the second and third quarters of this year.
The bank needed to slow consumer demand and prevent inflation driven by higher food and energy costs from spreading to locally produced goods and services, said Bertrand Delgado, a Latin America economist at IDEAglobal Inc., a New York-based research firm.
"Inflation pressure will remain very strong during this quarter," Delgado said. "Banxico needs to make sure this doesn't contaminate other prices," he said, referring to the central bank.
The peso hit a five year high after the report, rising 0.25 percent to 10.2099 per dollar from 10.2354 yesterday at 10:09 a.m. New York time. The currency has appreciated 5.91 percent this year, buoyed by the widening gap between U.S. and Mexican benchmark interest rates.
Less Vulnerable
Mexico's government says the economy is less vulnerable to a slowdown in the U.S. than it was during the U.S. recession of 2001. Even so, Mexican consumer confidence fell more than economists estimated in June, to the lowest since January 2002.
President Felipe Calderon on June 18 announced an accord with industry groups to freeze the price of canned tuna, coffee, beans and about 150 other items in a bid to hold down inflation. Wheat, corn and rice have risen to records this year because of shrinking global stockpiles and more demand.
Calderon has also tried to fight higher food prices by lifting import tariffs on corn, wheat, rice and beans in May. He eliminated import taxes on nitrogen-based fertilizer, and cut in half the tax on imported powdered milk.
To contact the reporter on this story: Jens Erik Gould in Mexico City at jgould9(at)bloomberg.net |
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