Mexico Cuts Spending After Brexit Vote Causes Assets to Tumble

  • Government plans to reduce outlays by 31.7 billion pesos
  • Officials meet next week to decide on interest rates

Mexico announced it would cut federal spending by 31.7 billion pesos ($167.9 billion), reducing the country’s international funding needs as emerging-market assets worldwide tumble following the U.K.’s decision to leave the European Union.

A decision on whether to increase the country’s key interest rate will be made next week at a June 30 board meeting after analyzing the impact on inflation, central bank officials said in a joint press conference Friday with the Finance Ministry. The spending cut is the second this year after officials reduced the federal budget by 132 billion pesos in February.

Market volatility due to the so-called Brexit “impacts the government’s finances and so we are tightening our belt," Finance Minister Luis Videgaray said.

While the peso headed for its biggest daily loss in almost five years on Friday, the currency is down just 0.4 percent this week following five straight days of gains spurred by speculation that the U.K. would vote to stay in the EU. The peso, often used as a proxy for risk in other markets, was caught up in a wave of selling Friday after the vote proved speculation false, with stocks plunging across the globe and the British pound falling the most on record. Yields on Mexico’s benchmark peso-denominated bonds jumped 7 basis points to 6 percent, the highest in almost two weeks.

Mexico last raised its key interest rate to 3.75 percent on Feb. 17, after the peso had fallen 9 percent since the beginning of the year. It also introduced discretionary dollar sales, though Banxico hasn’t intervened again since the announcement.

“I can assure you that we will be ready to act at every opportunity,” said Roberto del Cueto, deputy governor at the central bank, adding that the bank would intervene in the foreign exchange market only when the market moves in a ’disorderly’ manner.

Only 0.7 percent of the country’s total trade is with the U.K., Videgaray said. The country’s $177 billion in international reserves and its $88 billion credit line with the International Monetary Fund give the country the necessary tools to defend its currency if necessary, he added.

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