Mexico peso firms, bonds fall as inflation surges

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MEXICO CITY, May 22 (Reuters) - Mexico's peso firmed on Thursday and bonds fell to a four-month low after a report showed annual core inflation surged to a six-year high, raising bets that the country's central bank may raise interest rates.

The peso <MXN=> MEX01 pared early losses to strengthen 0.09 percent to 10.36 per dollar, on track to post a nearly five-year high, while the price of the government's benchmark 10-year peso bond <MX10Y=RR> fell to a four-month low.

The benchmark IPC stock index .MXX rose 0.55 percent to 31,298 points, boosted by gains in shares of America Movil after Deutsche Bank upgraded the stock to "buy" from "hold."

Mexico's annual inflation accelerated in early May to its fastest clip in more than three years as a world food crisis pushed up costs for staples like rice and chicken, while closely watched core inflation surged to its highest level since April 2002.

"We don't expect the central bank to raise its overnight rate in 2008 ... but the risks that this will happen have increased," wrote Luis Flores, an economist with IXE brokerage in Mexico City, in a note to clients.

Some analysts expect rising food prices could continue to push up inflation and force the central bank to raise interest rates in the coming months.

The 10-year peso bond fell 0.194 of a point in price to bid 97.539, pushing its yield up 4 basis points to 8.13 percent, its highest since Jan. 11.

The possibility that the central bank could raise borrowing costs has helped the peso rise since Monday to its strongest levels since July 2003.