June 20 (Bloomberg) -- Mexico's central bank unexpectedly increased its benchmark interest rate and said inflation may exceed its forecast this year and in the beginning of next.

Banco de Mexico's five-member board voted today to raise the overnight lending rate by a quarter percentage point to 7.75 percent. Only eight of 26 economists surveyed by Bloomberg forecast an increase, while the rest predicted the bank would leave rates unchanged.

The decision to lift rates defied suggestions by President Felipe Calderon, who has hinted that borrowing costs are already too high. He urged the central bank on June 4 to take into account the spread, or difference, in benchmark interest rates between Mexico and the U.S. when setting monetary policy.

``The recent inflation dynamic is worrying,'' the bank said in a statement on its Web site. ``The balance of risks for inflation has worsened.''

Mexican consumer prices rose 4.95 percent last month from a year earlier, the most since December 2004, driven by food, housing and air transportation costs. That annual inflation rate came close to exceeding the bank's forecast of 4.5 percent to 5 percent in the second and third quarters.

``The bank needs to send a signal to the market,'' said Rafael de la Fuente, senior economist for Latin America at BNP Paribas in New York.

Peso, Bonds

The peso strengthened 0.3 percent to a five-year high of 10.2781 per dollar at 10:32 a.m. New York time. Yields on the government's benchmark 10 percent bonds due December 2024 rose 2 basis points, or 0.02 percentage point, to 8.97 percent. The bond's price slipped 18 centavos to 108.83 centavos per peso, according to Banco Santander

Calderon announced this week that industry leaders reached an accord with the government to freeze the price of tortillas, cooking oils, beans and about 150 other items this year. He said the agreement would help fight inflation and ensure Mexico's poorest families can still afford food.

The bank said at its last meeting that the risks of lower economic growth had increased. April industrial production fell 0.8 percent when adjusted for seasonal factors, the national statistics agency said June 17. Economic growth slowed to 2.6 percent in the first quarter.

Morgan Stanley, Credit Suisse and Barclays Capital released reports in the past week predicting that Banco de Mexico would increase its key lending rate by a quarter-point today.

Inflation Risks

``The balance of risks on the inflation front have deteriorated since the central bank's last meeting in May,'' said Gray Newman, chief Latin America economist at Morgan Stanley in New York, who forecast a rate increase.

Barclays said it based the forecast on the outlook for inflation, rising global food prices and a June 16 central bank presentation highlighting the importance of its independence.

Calderon has also tried to fight higher food prices by lifting import tariffs on corn, wheat, rice and beans in May. He eliminated import taxes on nitrogen-based fertilizer, and cut in half the tax on imported powdered milk.

To contact the reporter on this story: Jens Erik Gould in Mexico City at jgould9@bloomberg.net

Last Updated: June 20, 2008 10:34 EDT