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Rising costs push Mexico to hike rates

The central bank adds a quarter-point to its benchmark despite the government's move to freeze food prices.

June 21, 2008|Marla Dickerson | Times Staff Writer

MEXICO CITY — Mexico's central bank raised its benchmark interest rate by a quarter of a percentage point to 7.75% on Friday, citing fears of inflationary pressures that have sent food prices spiraling upward.

It was the first hike since October, when the Bank of Mexico raised the overnight lending rate by a similar amount in the face of rising consumer prices.

Friday's increase surprised some analysts and came just two days after Mexican President Felipe Calderon announced a pact with food processors to freeze prices through the end of the year on more than 150 pantry staples.

Economists had interpreted that move as a bid to persuade the Bank of Mexico to stand pat and hold off on a rate hike that might put a drag on the nation's gross domestic product growth. Mexico's economy so far has proved resilient in the face of a slowdown in the United States.

But with inflation hitting an annualized rate of 4.95% last month, a 3 1/2 -year high and well above Mexico's long-term target of 3%, the independent bank shrugged off the political pressure to keep rates steady. Food inflation was up sharply in May, reaching 9.4%.

That's hitting poor consumers particularly hard because they spend the largest part of their income on groceries.

"The recent dynamic of inflation is worrying," the bank said in a statement. "World inflationary pressures have intensified due to strong price increases in food, energy and other raw materials."

Exploding food and fuel prices have reignited overall inflation throughout Latin America. Venezuelan inflation reached an annualized rate of 31.4% in May.

Consumer prices in Argentina were up 9.1% last month, according to official estimates. But some private-sector analysts say the government is manipulating the data. They estimate that Argentina's real inflation rate is running above 20%.

Mexico's inflation is modest in comparison. But the central bank has been hawkish in combating it. Less than a decade ago, the Mexican economy was pummeled by inflation that approached 20%.

The central banks of Chile and Brazil have likewise raised rates in recent weeks because of inflation concerns.

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marla.dickerson@latimes.com

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