* Flexible foreign exchange rates help food effects
WASHINGTON May 2 (Reuters) - Sharp increases in food prices will hit poorer Latin American countries like Bolivia, Dominican Republic, Guatemala and Honduras the hardest, raising their inflation rates by more than 5 percentage points this year, according to a new report released on Monday.
The report by the Inter-American Development Bank, which focuses on Latin American and the Caribbean issues, said countries hardest hit were those where food makes up a large part of their overall inflation basket and they have limited or no exchange rate flexibility to fall back on.
Countries with flexible exchange rates such as Brazil, Colombia and Uruguay are able to cope better with food price rises as long as they allow their currencies to appreciate and are willing to raise interest rates, the report said.
Brazil and other large economies in the region are already struggling with currency appreciations caused by a surge in private capital inflows they blame on super low interest rates in sluggish advanced economies such as the United States.
The added pressure from higher food prices on Brazil and others is a challenge for policymakers.
"The loss of competitiveness is clearly a risk for Brazil, Colombia and Mexico, which appear to absorb international commodity price shocks through large, and permanent, exchange rate appreciations," the report noted.
Stiff rises in prices of sugar, wheat and maize have contributed to record international food prices in January and February, just three years after the last food price crisis.
Pricier food is especially difficult for the poor because studies show the bulk of their disposable income goes toward buying food and any cutback increases hunger and malnutrition.
The current price surge has been blamed on increased demand from emerging market economies such as China, increasing use of maize to produce ethanol in the United States, and slower agriculture productivity growth.
Export bans, price controls and food hoarding by some countries have also distorted global food markets, the report said, dismissing those that blame the rise on speculators.
The IADB economists noted that if food prices remain at current highs, Bolivia, the Dominican Republic and Honduras should see the most significant rise in their inflation rates of more than 5 percentage points this year.
The report singled out Guatemala as a "case for concern" since its exchange rate flexibility does not appear to prevent international food prices from passing through to domestic food prices and general inflation, the report said.
It noted that non-food inflation could also jump in several countries, including the Dominican Republic and Guatemala.
Meanwhile, inflation increases of between 2 and 5 percentage points are likely in the Bahamas, Panama and Peru. Brazil, Mexico and Colombia should see inflation rate increases of no more than an additional one percentage point, the IADB report said.
In the Caribbean and much of the Central American region, countries fix or have only very limited exchange rate flexibility and therefore feel the effects of a rise in international food prices, the report said.
In poorer Central America food has one of the highest weights in the overall consumption basket, and the urban poor are most at risk, it said.
"It is therefore necessary to increase aid to these groups and improve its targeting, perhaps through reformed conditional cash transfer schemes, to compensate for the effect of the food price surge," the institution urged.
(Reporting by Lesley Wroughton; Editing by Diane Craft)