Mexico surprises markets with rate hike

Mexico's central bank (Banxico) surprised the markets on Wednesday when it raised the key interest rate 50 basis points at an extraordinary meeting.

The decision to hike the rate to 3.75% was made unanimously by the Banxico board.

The board said in a release that international market volatility had increased since the last monetary policy meeting and that the external environment facing the Mexican economy had deteriorated. It also said that the continued fall in oil prices had negatively affected public finances and the current account, and its impact on the currency could lead to increasing inflation expectations.

The rate announcement was coordinated with the finance ministry, which announced that the government will cut public spending by 132bn pesos (US$7.2bn) in a preemptive move in the face of lower oil prices. The plan contemplates a cut of 100bn pesos in the budget of state-owned energy giant Pemex.