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UPDATE 1-Mexico central bank unexpectedly hikes key rate by 25 bps - REUTERS

MAY 18, 2017

(Adds comments from central bank and economist, background)

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May 18 The governing board of Mexico's central bank unanimously hiked its benchmark interest rate by 25 basis points to 6.75 percent on Thursday, surprising most market participants who expected the bank to keep rates steady as it sought to keep above-target inflation in check.

The bank said in a statement after its monetary policy meeting that it hiked the rate to its highest since March 2009 in order to "avoid contagion in the process of price formation, anchor inflation expectations" and help inflation converge to target.

Annual inflation is running at its fastest pace in nearly eight years, above the bank's 2 percent to 4 percent target range, as consumer prices rose 5.82 percent in the year through April.

While 17 of 25 analysts and economists surveyed in a Reuters poll had expected the central bank to keep the rate steady at 6.5 percent, a minority of them forecast a rate increase.

Speaking at an event in Washington in April, Banco de Mexico chief Agustin Carstens hinted that the cycle of monetary tightening might not be over, saying there were "still some issues that need to be taken care of."

"Banxico seems to think it has more work to do. We're comfortable with our forecast for one final 25bp hike in the policy rate to 7.0 percent% in this cycle," said Neil Shearing, chief emerging markets economist at Capital Economics. (Reporting by Mexico City newsroom; Writing by Anthony Esposito; Editing by Jeffrey Benkoe)

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