Mexico unleashes surprise rate hike to smoke out peso speculators

A picture illustration shows Mexican pesos and U.S. dollars banknotes. (Edgard Garrido / Reuters)
A picture illustration shows Mexican pesos and U.S. dollars banknotes. (Edgard Garrido / Reuters)

By Miguel Gutierrez and Michael O’Boyle / Reuters

Mexico on Wednesday launched an assault on speculators who have battered the local peso currency by unleashing a surprise interest rate hike, a new intervention policy and budget cuts.

Mexico’s peso MXN= surged nearly 3 percent after the central bank offered dollars directly to banks, and then unexpectedly raised its benchmark interest rate MXCBIR=ECI by 50 basis points to 3.75 percent.

It was the first time it has moved without advising the market the board was meeting since introducing a reference rate in 2008.

The Finance Ministry also announced cuts to the 2016 budget in a bid to shore up confidence in Mexico’s economy following a collapse in oil prices that hobbled government revenue from crude sales.

Central Bank Governor Agustin Carstens said the board decided to hike to help stem peso losses and keep inflation expectations from spiking higher and risking an upward spiral in consumer prices, which rose off a record low in January.

The peso had been the most-punished, highly traded currency in the global market rout of early 2016, slumping to a record low near 19.50 per dollar. But Carstens said that the peso had been unfairly hammered and was not trading on its own fundamentals.

http://www.reuters.com/article/us-mexico-economy-idUSKCN0VR02L

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