Mexico peso at 5-yr high, shares fall on rate hike

(Updates with closing quotes, adds trader quote)

MEXICO CITY, June 20 (Reuters) - Mexico's peso jumped to a five-year high against the dollar but stocks slumped on Friday after the central bank raised its key interest rate for the first time in eight months to tackle rising inflation.

The peso MXN= MEX01 strengthened 0.36 percent to 10.2750 per dollar, its strongest central bank close since early June 2003, while the benchmark IPC stock index .MXX dropped 1.05 percent to 29,533.44 points.

The central bank lifted the key rate MXCBIR=ECI by 25 basis points to 7.75 percent at its monthly monetary policy review, saying inflation could increase beyond its forecast, although it also said risks to economic growth persist. For details, see [ID:nN20455430]

"The Mexican market overreacted to the central bank announcement," a trader said and noted that stock prices bounced back from intraday lows, helped by pension funds that stepped in to snap cheap companies.

Mexico has weathered inflation from soaring international food and energy prices better than most other countries in Latin America, but its annual rate spiked to 4.95 percent in May, the highest in more than three years.

The rate hike widens the spread between the U.S. target interest rate and Mexico's key rate, making peso-denominated assets more attractive to investors.

The peso has gained 6.28 percent this year as the United States has cut interest rates while Mexico has sought to fight persistent inflation with a higher rate.

Long-term Mexican bonds surged following the decision as investors bet the rate hike would help reduce inflation.

The price of the benchmark 20-year peso bond MX20YT=RR rose 0.328 of a point to bid 86.975, pushing its yield down 4 basis points to 8.93 percent.

Investors loath inflation because it eats into the value of their assets.

"The uncertainty about a hike in interest rates has dissipated and investors are more confident about going into the bond market, so that's why there's a generalized fall in yields," said a Mexico City-based trader.

In stock trading, shares in cement maker Cemex (CMXCPO.MX) fell 2.18 percent to 24.65 pesos, while conglomerate Alfa (ALFAA.MX) fell 2.11 percent to 74.17 pesos.

Shares in Grupo Modelo (GMODELOC.MX) ended down 3.16 percent at 53.02 pesos. The brewer's chief executive Carlos Fernandez resigned from the board of U.S. partner Anheuser-Busch Cos Inc BUD.N, which owns 50 percent of the Mexican company.

Fernandez's move could signal the loss of a potential key ally in the U.S. brewer's fight to fend off an unsolicited $46.3 billion takeover bid from Belgian-Brazilian beer giant InBev NV INTB.BR. (Reporting by Robin Emmott, Lizbeth Salazar and Inaki Maillard; editing by Gary Crosse)