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By Michael O‘Boyle and Alexandra Alper
MEXICO CITY, July 30 (Reuters) - Mexico substantially bolstered its intervention program on Thursday in an effort to defend the peso 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 country’s central bank, Banco de Mexico, announced it had left its key interest rate at 3.0 percent, as expected.
The central bank said that the outlook for inflation, which cooled to a record low of 2.76 percent in early July, had improved in the short term, despite the peso’s losses. But it also noted that economic prospects had worsened.
The commission said it would raise daily dollar auctions to $200 million from $52 million to support the peso, while also lowering the threshold of peso losses that can trigger the sale of an additional $200 million per day.
The peso tumbled to a record low of 16.4880 per dollar before the announcement, but it reversed losses to end slightly stronger from Wednesday at 16.2671. Analysts said the measures were more aggressive than expected and that they could help the peso stabilize.
Finance Minister Luis Videgaray told local radio that Mexico would take further measures if necessary.
Mexico central bankers said peso losses had been driven by uncertainty about when the Federal Reserve would raise interest rates, adding that global volatility could worsen.
Alberto Ramos, an economist at Goldman Sachs in New York, said 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 falls past 17 per dollar.
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 percent, in a change from prior language.
Dirk Willer, a strategist at CitiFX, said the central bank could even hike interest rates before its next scheduled meeting in September if a drop in the peso starts to hit inflation expectations.
“They hope they don’t have to go there, but they at least put the warning out to the market,” he said.
Still, he expected authorities could further increase dollar sales before resorting to a hike outside its published calendar.
Mexico’s central bank is watching the Fed closely. In a poll by Reuters last week, analysts forecast a 25 basis point hike in Mexico on Sept. 21 if the Fed hikes rates that month.
The peso has tumbled over 25 percent since July 2014, but has not stoked widespread price pressures yet.
The central bank forecast that inflation will remain below its 3 percent target for the rest of the year because of sluggish growth while noting there was no sign that currency weakness had spurred widespread inflation pressure.
Nonetheless, policymakers said there were significant risks for a faster pace of price gains, such as a contamination of inflation expectations from the weak peso. (Editing by Meredith Mazzilli and Diane Craft)