Mexico Bank Lifts Key Rate for Third Straight Month

By Jens Erik Gould

Aug. 15 (Bloomberg) -- Mexico's central bank increased its benchmark interest rate for the third straight month and signaled easing commodity prices and slower economic growth may reduce the need for further tightening.

The bank's five-member board, led by Governor Guillermo Ortiz, raised the key lending rate a quarter of a percentage point to 8.25 percent today, the highest since December 2005.

Policy makers said the risks of an economic slowdown had increased, and that food and energy prices, after spurring the fastest inflation in almost four years, may ease soon. The ``dovish'' comments indicate the bank is less likely to raise rates again this year, said Benito Berber, a strategist at RBS Greenwich Capital Markets in Greenwich, Connecticut.

``Banxico will most likely not hike anymore,'' Berber said, referring to the central bank. ``Those statements are very clear and characterize a very dovish view.''

Mexico's peso slid 0.2 percent to 10.1902 per dollar at 10:06 New York time, from 10.1684 yesterday, on the reduced likelihood of further rate increases this year.

On July 30, the bank surprised analysts by raising its inflation forecasts by an average of 0.89 percentage point over the next two years. It said annual inflation will rise as high as 6 percent in the fourth quarter, up from a previous forecast of no more than 4.75 percent.

Consumer prices climbed 5.39 percent in July from a year earlier, driven by higher costs for food and gasoline. It was the sixth straight month inflation accelerated.

Anchoring Expectations

Today's rate increase aims to anchor inflation expectations and will help reduce annual inflation to the bank's target of 3 percent by 2010, policy makers said. Inflationary pressures are originating in the supply side rather than from demand, the bank said in a statement accompanying its decision.

Yields on Mexico's 10 percent bond due December 2024, the country's most-traded security, fell 6 basis points today, or 0.06 percentage point, to 8.75 percent. The price rose 0.52 centavo to 110.79 centavos per peso, according to Banco Santander SA.

The bank said last month that inflation will probably remain above its target until 2010, after previously expecting to reach its objective in 2009.

Mexico's peso has gained 7.1 percent this year as interest- rate increases by Banco de Mexico swelled the gap between Mexican and U.S. benchmark lending rates.

Price Accord

Mexican President Felipe Calderon in June 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 prices. Wheat, corn and rice reached records on global markets this year, before retreating because of improved crop forecasts and a strengthening dollar.

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@bloomberg.net