MEXICO CITY (Bloomberg) – 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, raised the key lending rate by a quarter percentage point to 8 percent, the highest since December 2005. Policy makers said the inflation outlook has worsened and they will raise their forecasts by an average of about half a percentage point in a quarterly report this month.
The peso surged to a five-year high on speculation the central bank may further increase interest rates, which would widen the yield advantage Mexico has compared with the U.S. The Mexican peso is up 6.8 percent this year against the dollar.
“The statement is very hawkish,” said Alfredo Thorne, head of Latin America research for JPMorgan Chase & Co. in Mexico City. “As long as inflation expectations remain high and there are risks, then they will keep on hiking.”
Thorne said he expects a rate increase to 8.25 percent in August and possibly another one in September.
Inflation in Latin America’s second-biggest economy has accelerated for five straight months on rising food and energy costs.
Consumer prices rose 5.26 percent in June, the first month that inflation exceeded the bank’s forecast of no more than 5 percent in the second and third quarters of this year. The central bank targets inflation of 3 percent, plus or minus one percentage point.
--------------------“Anchored” expectations
“It is indispensable to keep inflation expectations well anchored,” the bank said in its statement. “Monetary policy plays a fundamental role in this.”
The decision matched the forecast of 21 of 28 economists surveyed by Bloomberg. Seven others said the rate would stay unchanged. The bank released its report 22 minutes earlier than scheduled today because of a technical failure, according to its press office.
“The scenario is worse than expected,” said Luis Flores, economist at IXE Grupo Financiero SA in Mexico City. “Food and energy prices will continue to exert pressure. The central bank is looking at this and decided to raise rates so inflation doesn’t get out of control.”
Mexico’s Bolsa index has gained 2.4 percent this year in dollar terms, compared with a decline of 14 percent by the Standard & Poor’s 500 Index, the benchmark for U.S. stocks.
----------------------“No choice”
Policy makers were forced to raise borrowing costs as annual inflation exceeds the bank’s target of no more than 4 percent, said Bartosz Pawlowski, a strategist at TD Securities Ltd. in London.
“It had no other choice but to act,” Pawlowski said. “The bank has to tackle inflation expectations and do something about the current situation.”
The bank surprised analysts last month by raising borrowing costs for the first time in eight months.
Gray Newman, chief Latin America economist at Morgan Stanley in New York, said the bank’s statement today didn’t clarify whether policy makers are likely to further increase rates. Newman said Banco de Mexico may give a clearer indication in its July 30 report, he said.
“They didn’t send a signal that they’re through for the time being,” Newman said.
-------------------------Economy
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. Still, Mexican consumer confidence fell more than economists estimated in June to the lowest since January 2002.
The bank said today it estimates the economy expanded less in the second quarter than it did in the first. Gross domestic product grew 2.6 percent in the first quarter, or 3.7 percent when seasonally adjusted.
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.