UPDATE 2-Mexico cenbank follows Fed hike in lock-step to support peso
(Adds economist comment, background)
By Michael O'Boyle and Alexandra Alper
MEXICO CITY Dec 17 (Reuters) - Mexico's central bank hiked borrowing costs on Thursday for the first time in seven years in a bid to stem further weakening in the peso after the Federal Reserve lifted U.S. interest rates the day before.
The Banco de Mexico raised its benchmark interest rate by 25 basis points to 3.25 percent from a record low, as expected by 19 of 25 analysts surveyed by Reuters this week.
The central bank said it was raising interest rates even though inflation was at a record low because the Fed had hiked by a quarter percentage point.
Mexican policymakers said they were concerned that if they had not moved there might have been a "disordered" depreciation in the peso that could have affected inflation expectations.
Mexico's peso pared losses after the announcement to break past the key 17 per dollar level and trade nearly flat around 16.99 per dollar.
Central Bank Governor Agustin Carstens told Reuters last week that Banxico must be ready to "take care" of the peso by raising interest rates in order to prevent foreign investors from dumping local-currency government debt.
Even as other emerging markets have seen outflows this year, foreign holdings of about 2.07 trillion Mexican pesos ($122 billion) have held relatively steady, near record highs. Continuación...