The Bank of Mexico shocked the market with a big interest rate hike — and the peso is soaring

REUTERS/Suhaib Salem

The Bank of Mexico unexpectedly hiked their key interest rate to 4.25% from 3.75% Thursday. Economists were only expecting a 0.25% hike from the central bank.

In response, the peso has soared against the dollar. It was stronger by 1.29% leap to 18.253 per dollar as of 2:27 p.m. ET.

The Bank said that despite weakness in the global economy and the recent exit of the UK from the European Union, the bank said in a statement that in order to keep inflation expectations anchored lower as headline inflation has been moving upwards, the bank felt it needed to hike its rate.

The Bank of Mexico said it expects inflation to continue heading upward and remain roughly around 3% going forward, but due to the deterioration of external events that pose a risk of higher inflation the Bank decided it needed to hike.

The bank did say that economic activity in the country slowed in the second quarter, highlighting the weakness of manufacturing and exports in particular. (You can read the full statement in Spanish here.)

Neil Shearing at Capital Economics said that the move was focused squarely on the country's currency.

"The decision by the Mexico’s central bank to raise interest rates by a larger-than-expected 50bp was aimed squarely at supporting the peso," Shearing wrote in a note to clients.

"The early signs are that it has worked but we suspect that interest rates will probably rise again over the second half of this year."

The bank, nicknamed Banxico, began hiking rates in December and hiked again in February.

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