Mexico's central bank unexpectedly raised interest rates and said inflation will take longer to retreat than policy makers previously estimated.

The five-member board, led by Governor Guillermo Ortiz, lifted the benchmark rate a quarter percentage point to 7.50 percent, surprising 22 of 29 economists surveyed by Bloomberg. The peso climbed to a three-month high.
Inflation hasn't slowed as quickly as the central bank predicted in May, when it said the rate would fall to 3 percent by the end of next year.
The bank Sunday revised he end of 2009 because of rising food prices and higher taxes approved by Congress last month. It also dropped its restrictive bias, hinting it doesn't intend to follow with more increases.
“They had to show commitment to the target,” said Alonso Cervera, a Latin America economist at Credit Suisse Group in New York, who predicted the increase correctly. It would have been very odd for them to increase their inflation forecast and then not come through with a rate hike.
The economists who predicted today's increase, such as Cervera, Dresdner Kleinwort's Omar Borla and RBS Greenwich Capital Markets' Benito Berber, said they don't expect the bank to raise interest rates again this year. In today's statement, said the threat to Mexico's economic expansion from a decelerating U.S. economy had increased.
Preventive
Clearly it was a preventive move,” Borla said. The decision marks the second time this year the central bank unexpectedly raised borrowing costs in Latin America's second-largest economy. The bank in April also unexpectedly increased its rate by a quarter percentage point.
Mexico's benchmark stock index rose 250.66, or 0.8 percent, to 32,123.6. The peso gained 0.7 percent to 10.7345 per dollar.
A report Oct. 24 showed core inflation rose more than expected in the first half of October because of higher prices for pasteurized milk and tobacco.
Core consumer prices, which exclude fresh food and energy, rose 0.21 percent, more than the median estimate of 0.15 percent in a Bloomberg survey of 18 economists, putting them at 3.87 percent on an annual basis, higher than the 3.5 percent forecast the central bank has for the end of the year.
Core Prices
That report led RBS Greenwich's Berber to change his forecast to predict central bankers would raise to 7.50 percent Sunday. The central bank has missed its 2-to-4 percent inflation target in eight of the past 13 months.
Rising food prices may lead Mexico to suspend import duties on wheat for three months to reduce costs for local food producers, El Milenio newspaper reported Oct. 24, citing Economy Minister Eduardo Sojo.
Rate increases put the central bank at odds with President Felipe Calderon's administration.
“Finance Minister Agustin Carstens criticized the bank in April for raising rates, saying it had acted prematurely at a time of slowing economic growth. In an Oct. 23 interview from Washington, Carstens said Mexico doesn't have an inflation problem and ``there are no underlying inflation pressures.”
Central bankers seemed to disagree with that assessment Sunday in Congress last month passed tax legislation backed by Calderon that includes a 5.5 percent levy on gasoline that will take effect in January.
(Source: Bloomberg)