New | Mexico central bank defends peso, eyes weak economy

Mexico substantially bolstered its intervention programme to defend the peso on Thursday as the central bank warned that the currency could slump further after a recent string of record lows.

The currency commission, run jointly by the finance ministry and the central bank, said it would increase daily dollar auctions just as the Banco de Mexico announced it had left its key interest rate at 3.00 per cent, as expected. The central bank said the outlook for inflation, which cooled to a record low of 2.76 per cent in early July, had improved in the short term despite the peso’s losses. But it noted economic prospects had worsened.

Central bankers said peso losses had been driven by uncertainty about when the US Federal Reserve would raise interest rates, adding global volatility could get worse.

Alberto Ramos, an economist at Goldman Sachs in New York, said that the tone of the statement suggested that Mexico would raise interest rates once the Fed moved. But he said an increased tone of concern about the peso suggested there is a chance that Mexico could raise borrowing costs before the Fed if the peso slumps further from levels around 16.26 per dollar to past 17.

Policymakers said they were ready to act "with total flexibility and in the moment that conditions require" to keep inflation around its objective of 3 per cent, in a change from prior language.

The peso has tumbled over 25 per cent since July 2014, but has not stoked widespread price pressures yet.