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Mexico central bank raises rate aggressively

Staff writer |
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.

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The Banco de Mexico raised its key rate by half a percentage point to 4.25 percent.

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.