Mexico's central bank raised its benchmark target for the overnight interest rate by 50 basis points to 3.75 percent at an extraordinary board meeting in response to the depreciation of the peso and the likely rise in inflation expectations in excess of its 3.0 percent target.
The Bank of Mexico, which in December raised its rate by 25 basis points in the wake of the U.S. Federal Reserve's first rate hike since July 2006, said today's rate rise did not herald the beginning of a monetary tightening cycle though it would closely monitor inflation and inflation expectations along with the exchange rate and its possible transfer to consumer prices.
At its last meeting on Feb. 4, the bank's board of governors left its rate steady as it expected inflation to converge to its target but also warned that the economic situation had changed in an unfavorable manner and risks had risen.
Economists viewed the central bank's statement as a sign it could raise rates if the peso continued to decline.
Since this meeting, volatility in financial markets has increased and the external environment facing Mexico has continued to deteriorate, the bank said, noting that the continued fall in oil prices had affected public finances and the current account, which has hit the peso's exchange rate.
The peso has been falling since mid-2014 and was trading at 18.9 to the U.S. dollar earlier today, down 22.2 percent since the start of 2015 and 9 percent since the start of 2016. On Feb. 11 the peso hit an all-time low of 19.3 to the dollar.
After the rate hike was announced, the peso rose to 18.3 to the dollar and the central bank was reported to have sold dollars.
Earlier today the Mexican government announced plans to reduce spending by 132.3 billion pesos, including 100 billion that will be cut by state-owned oil company Petroleos Mexicanos, better known as Pemex.
The central bank said its rate hike was taken with the knowledge of the Federal government's decision to strengthen its finances and its board deemed its "appropriate to contribute to strengthening economic fundaments of the country in its area of responsibility."
Earlier this month the central bank's governor, Agustin Carstens, forecast economic growth of slightly more than 2.5 percent this year, about the same as in 2015 according to preliminary data.
Mexico's headline inflation rate rose to 2.61 percent in January from 2.13 percent in December.