UPDATE 4-Mexico hikes key rate, peso surges after surprise FX intervention
(Adds fresh quote, details on auctions, reserves) By Miguel Gutierrez and Michael O'Boyle MEXICO CITY, Feb 17 (Reuters) - Mexico's central bank on Wednesday unexpectedly raised its benchmark interest rate by 50 basis points to 3.75 percent, sparking a rally in the long-battered peso currency, while the government vowed to cut spending. Mexico's central bank also intervened directly in the foreign exchange market to sell dollars as part of a major policy shift to support the peso, which plunged to fresh lows in recent weeks. "This is not the beginning of a cycle of interest rate hikes," Agustin Carstens, governor of the Banco de Mexico, the country's central bank. The shift in foreign exchange intervention policy marks an unexpected break from Banco de Mexico's general preference for rules-based intervention and is the first time since 2009 that it has opted for direct dollar sales. Finance Minister Luis Videgaray said the government would make spending cuts to the 2016 budget to the tune of 0.7 percent of gross domestic product. He said the government would also propose that state oil company Pemex cut its expenses by 100 billion pesos. "Man, catching everyone by surprise. These guys are going the classical defense route. One would've figured that they wouldn't hike after the cuts from Hacienda/PEMEX," said Edwin Gutierrez, head of emerging market sovereign debt at Aberdeen Asset Management in London. The peso, which has been hit by sinking oil prices, surged on Wednesday, approaching its strongest level since Jan. 15, after marking a new all-time low last week at 19.4480 per U.S. dollar. The peso gained as much as 4.86 percent on Wednesday to 17.962 per dollar, at one point posting its biggest one-day gain since September 2011. It last traded at a 3.27 percent rise on the day at 18.2650. Dan Ivascyn, Group Chief Investment Officer at PIMCO, which has exposure to Mexico, told Reuters: "We find Mexican bonds and currency attractive from a long-term perspective. Short-term performance will continue to be influenced by moves in oil market." Mexico is committed to a freely floating exchange rate and usually refrains from opting for more direct forms of intervention used by other emerging market economies. Shares of companies with high dollar-debt exposure, such as banks and cement company Cemex, were sharply higher. Cemex traded 8.5 percent firmer at 9.54 pesos a share, while Banorte was up 4.6 percent at 90.46 pesos. Last month Mexico's currency commission, which is comprised of the central bank and the Finance Ministry, said it would maintain a daily dollar auction program that offered up to $400 million a day whenever the peso falls sharply. The central bank spent over $28 billion in the auctions, which were introduced in December 2014, according to Banorte. (Additional reporting by Elinor Comlay and Alexandra Alper in Mexico City, Jennifer Ablan in New York and Tariro Mzezewa in London; writing by Simon Gardner; editing by G Crosse, JS Benkoe and W Simon)
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