MEXICO CITY -- Responding to pressure from the United States, Mexico's central bank announced yesterday that it was raising already high short-term interest rates a further 10 percentage points, pushing the rate on some government debts to 50 percent.
U.S. officials have insisted that Mexico tighten its credit substantially and reduce its money supply as part of the conditions of $20 billion in U.S. assistance proposed by the Clinton administration.
An official at the Mexican central bank said yesterday that the decision to increase interest rates "arose from the negotiations between Mexico and the United States" continuing in Washington, and the sharp declines in the value of the peso at the end of last week.
Bank officials said the higher rates should help stem the flow of money out of Mexico and strengthen the badly weakened peso by making government debt and other investments denominated in pesos more attractive to buyers.
The currency markets responded favorably to the central bank's move, and the peso rose to an exchange rate of 5.565 to the dollar, up from 5.725 to the dollar Friday.
But Mexican stocks fell, with the benchmark index dropping 64.33 points, or 3.51 percent, to close at 1,766.14, a loss that reflected investors' concerns that higher interest rates would hurt company earnings.
Analysts reacted somewhat skeptically to the central bank's rate move, saying that while the higher rates might bolster the peso in the short run, they would hit Mexico's faltering banks hard. The banks' large portfolios of overdue loans will increase, analysts said, and credit will be so costly that bankers would see little new business.
"All we've seen so far has been very weak policy responses to a crisis that is a lot more fundamental," said Rogelio Ramirez de la O, an economist in Mexico City. "This will have only a limited effect on the market, and the long-term outcome is not necessarily positive."
Mr. Ramirez said the central bank might have increased interest rates yesterday in an attempt to influence the negotiations in Washington over the details of the $20 billion in direct U.S. help.
The intense negotiations between U.S. and Mexican finance officials that have been going on since Thursday resulted in a preliminary agreement by the Mexicans to sharply increase interest rates.
A spokesman for the U.S. Treasury Department said that the two sides were making "good progress" at the talks led by Treasury Secretary Robert E. Rubin and Finance Minister Guillermo Ortiz.
Mexico's state oil monopoly, Petroleos Mexicanos, or Pemex, reacted in measured terms yesterday to a report from Washington that the United States was seeking fuller control over the flow of Mexican oil revenue as a condition for the economic help.
"The United States government could only have access to some of these funds on a contingency basis if there had been a prior case of Mexico failing to meet payment obligations," a statement by Pemex said.
Pemex did not confirm or deny the reported proposal to channel all oil-export revenue through the U.S. Federal Reserve, but said that both it and the Mexican central bank would "have the use of the funds obtained from oil exports, with every freedom and with no restriction of any kind."
It added that, in any case, such arrangements were not new, and it called the possibility of a Mexican default on loan payments a "remote eventuality."
Economists and investors have many doubts about Mexico's economic recovery plan, but some of the most persistent arise from Mexico's lack of a viable exchange-rate policy for determining the value of the peso against the dollar.
The Mexican government has allowed the peso to float freely since Dec. 21, and as a result the peso's value has shifted erratically. At yesterday's exchange rate of 5.565, the peso is worth a bit less than 18 cents.
The central bank, while so far rejecting suggestions that Mexico establish an independent currency board to set the peso's value, is reportly close to approving a mechanism that would index debt to the rate of inflation.
Economists in Mexico and in the United States say that such a plan, if adopted, would in effect constitute a new exchange-rate policy.
Under the plan, the Mexican central bank would make regular, even daily, measurements of the rate of inflation. The principal of a loan would be adjusted to maintain the same inflation-adjusted level as before, relieving inflationary pressures to raise interest rates.