Mexico’s central bank aggressively raised its key interest rate more than expected on Thursday in a bid to support the peso and calm concerns that currency weakness could inflame inflation.
The Banco de Mexico raised its key rate by half a percentage point to 4.25 percent, above the 25 basis-point hike projected by the median of analysts surveyed by Reuters.
The peso has been buffeted by global volatility since May and is the second-worst performing emerging market currency this year behind the Argentine peso. It reversed losses to gain around 1 percent after the announcement.
Policymakers said they hiked rates to prevent deep peso losses from hitting inflation expectations after “external conditions deteriorated in a significant way.”
“I wouldn’t rule out that they could hike again, even before the Fed, if the exchange rate keeps trading very poorly,” said Benito Berber, an analyst at Nomura in New York, referring to the U.S Federal Reserve Bank.
The central bank said the balance of risks for both inflation and economic growth had deteriorated, even though the inflation outlook was congruent with its 3 percent target.
Mexico’s peso slumped more than 7 percent in May, its worst monthly loss in four years, and last week’s surprise vote by the United Kingdom to leave the European Union drove the currency to a record low.
The bank said that since its last decision in early May, the peso had suffered a big depreciation due to expectations of higher interest rates in the United States, and the so-called Brexit vote, which posed a new risk for the global economy.