Bank Of Mexico Raises Overnight Rate To 7.25% From 7%

The Bank of Mexico raised the overnight rate to
7.25% from 7% Friday in a surprise move it described as a preventive measure
and one aimed at "stressing the bank's commitment to price stability."

The unexpected monetary tightening came a year after the bank had lowered the
rate to 7%. Local bond yields rose, and stock market losses accelerated, while
the peso firmed against the dollar.

In its monetary policy statement, the central bank said that although both
overall and core inflation have remained in line with recent expectations,
uncertainty remains about some food prices, particularly tortillas.

Expectations that inflation will remain outside the bank's 2% to 4% target
range for a prolonged period increase the dangers of price contamination, the
bank said.

The market had been expecting the central bank to leave rates unchanged
following this week's below-estimate inflation readings for the first half of
April.

The consumer price index fell 0.21% in the two-week period, bringing the
annual rate down to 3.96% from 4.21% at the end of March.

Core inflation, which excludes energy and fresh fruit and vegetables, rose
0.03% in the first half of April, which brought the annual rate down to 3.60%
from 3.83% at the end of March.

Alonso Cervera, an economist at Credit Suisse, said the tightening was a big
surprise since the market hadn't perceived the worsening of inflation risks
which the central bank had warned about in its March statement.

He said he thought Friday's tightening "should have been done before" and
that it would be a one-off move. The Bank of Mexico didn't give any indication
of its bias following the hike.

Alfredo Coutino, Senior Economist for Latin America at Moody's Economy.com,
said he had been expecting the central bank to raise rates, but was surprised
it came Friday after the inflation decline in the first half of April.

"The inflationary reality finally opened the central bank's eyes, and
obligated it to prescribe the monetary medication," Coutino said in a report.

The central bank had "stubbornly kept a passive monetary attitude" even
though the CPI ended 2006 above 4%, the top of its target range, he added.

The Bank of Mexico said that although the economic slowdown could mitigate
risks of inflation pressure, "the board considers it appropriate to reinforce
its monetary stance in a preventive manner."

The bank said it expects gross domestic product to have grown by "close to
3%" in the first quarter.

The central bank also maintained its view that annual inflation would be
between 4% and 4.5% until the third quarter, and end the year between 3.5% and
4%. The bank's specific target is 3%. It said it expects a slight spike in
annual core inflation in May, which should begin easing again in June.

Coutino said "the correct monetary move taken by the central bank today would
be greatly appreciated by the economy, although financial markets and
particularly the stock market could react negatively in the short run."

The peso, which ahead of the decision had been trading weaker at MXN10.9675
to the dollar, was back to MXN10.9275 mid-session, little-changed from
Thursday's close.

A local currency trader said the rate decision was taken as positive, since
April's drop in inflation, largely the result of summertime electricity
subsidies in two northern states, was circumstantial.

He said he expected the peso to hold in a range between MXN10.92 and
MXN10.9550 Friday.

Local bond yields, which had fallen after this week's inflation report to
their lowest levels since January, rose sharply. The yield on the closely
watched 10-year government bond due 2015 was up 13 basis points to 7.57%, and
the 20-year yield on bonds due 2024 was up 16 basis points to 7.66%. Yields
rise when bond prices fall.

Losses in Mexican stocks, which had opened lower, steepened after the rate
hike. The market's leading IPC index was down 1.4% around midday.


-By Anthony Harrup, Dow Jones Newswires; (5255) 5080 3450;
anthony.harrup@dowjones.com

Source : http://www.agriculture.com