Mexico central bank urges renewal of tortilla pact

MEXICO CITY (Reuters) - Mexican central bank governor Guillermo Ortiz on Wednesday urged the government and food companies to renew price caps for tortillas that have acted as a buffer against inflation.

Tortillas, thin corn patties, are a staple of the Mexican diet. After a price rise began fueling inflation toward the end of 2006, the government pressured food producers and retailers to limit prices for corn flour and tortillas.

"For consumers, the price containment so far has been a success, and from my point of view it is important that this containment continues," Ortiz told reporters, according to a central bank transcript.

The so-called tortilla accord has helped cool inflation somewhat, but it is set to expire on April 30.

While the government cannot directly fix corn or tortilla prices, Mexico's President Felipe Calderon told Reuters in March he would likely strike a new deal with corn flour producers to cap prices.

Combined with increases for other basic foods, the rise in tortilla prices has kept inflation near or above the upper end of the central bank's tolerance range of 4 percent for months.

The United States' fast expanding ethanol industry has pushed corn prices higher this year than in 2006, and leading tortilla and corn flour maker Gruma (GRUMAB.MX) said in February it expects to raise its prices toward the end of 2007.

However, Ortiz said a recent fall in corn prices "should be a factor that mitigates pressure on prices."

But some economists are already betting the price caps will not be renewed, which might hit Mexican local currency bonds.

"This could result in correction in the long end of the Mexican curve," Spanish bank BBVA said in a report on Wednesday.