July September November 19,
Outline 1 2 Monetary Policy External Conditions 3 4 5 Economic Activity in Mexico Inflation Determinants Forecasts and Balance of Risks 2
Monetary Policy Conduction By constitutional mandate, the monetary policy in Mexico seeks to ensure the stability of the national currency s purchasing power. Reduced level and volatility. As a result, significant progress in curbing inflation has been made: Absence of second round effects derived from changes in relative prices. Better-anchored inflation expectations. Decrease in the inflation risk premium. 3
Over the last 2 years: In light of a favorable inflation environment, well-anchored medium- and long-term inflation expectations and slack conditions in the economy: The Board of Governors took advantage of the circumstances to adjust the monetary policy stance and to support the recovery of the economic activity. Thus, between March and June the Board reduced the reference interest rate by 150 basis points, without compromising the process of inflation convergence towards the 3 percent target. 4
2003 2004 2005 2006 2007 2008 In 3Q, the Board of Governors maintained the target for the Overnight Interbank Interest Rate at 3 percent. This considering: The transitory effect on inflation as a result of shocks in agricultural products prices. Overnight Interbank Interest Rate 1/ % November 10 9 8 That inflation expectations remained well-anchored. 7 6 5 That a considerable decline in inflation in late and its convergence to the 3 percent target in mid-2015 are anticipated. 4 3 2 1/ Since January 21, 2008, the Overnight Interbank Interest Rate is shown. Source: Banco de México. 5
Outline 1 2 Monetary Policy External Conditions 3 4 5 Economic Activity in Mexico Inflation Determinants Forecasts and Balance of Risks 6
External Conditions Global Situation in 3Q Growth World economy kept presenting signs of weakness: Advanced Economies: In Japan and the Euro zone economic activity remained weak, while in the U.S. and the U.K. it kept expanding. Emerging Economies: Lower dynamism of economic activity was observed. Inflation A reduction observed worldwide. Monetary Policy Expectations for the monetary policy stance in main advanced economies took opposite directions. The Federal Reserve confirmed its strategy of a gradual withdrawal of the monetary stimulus. The European Central Bank and the Bank of Japan announced additional monetary easing measures. In general, accommodative monetary stances are expected in most economies, including the emerging ones. 7
2000 2001 2002 2003 2004 2005 2006 2007 2008 World economy kept presenting signs of weakness in 3Q. World GDP Growth Annual % change Emerging Forecasts 10 8 6 World 4 2 Advanced 0-2 -4-6 Source: World Economic Outlook, International Monetary Fund. 8
I III I III I III I III I 2015 III 2015 2007 2008-2.1-1.5 0.1 0.8 1.6 1.8 2.3 2.5 2.9 2.7 2.7 2.8 2.8 2.9 2.9 3.5 3.5 4.6 4.5 4.6 In the U.S., the recovery of economic activity kept consolidating, following a strong expansion in 2Q. Likewise, labor market conditions continued to strengthen gradually. Gross Domestic Product Quarterly % change at annual rates, s. a. Observed Forecast 6.0 5.0 4.0 3.0 11 10 9 8 Change in Non-farm Payrolls and Unemployment Rate Thousands of jobs and % of EAP, s. a. Unemployment rate 600 400 200 2.0 7 0 1.0 6-200 4Q 2015 0.0-1.0-2.0-3.0 5 4 3 2 Change in non-farm payrolls October -400-600 -800 s.a./ Seasonally adjusted data. Source: Bureau of Economic Analysis and Blue Chip. EAP/ Economically Active Population. s.a./ Seasonally adjusted data. Source: Bureau of Labor Statistics. 9
In 3Q inflation declined worldwide, both due to lower international prices of energy and food products, and due to prevailing slack conditions, particularly in most advanced economies. 2007 2008 United States Headline Inflation Annual % change Euro Zone United Kingdom 7.0 6.0 5.0 4.0 3.0 2.0 1.0 0.0 Japan 1/ September -1.0-2.0-3.0 1/ Exclude the effects of the consumption tax rise. Source: Haver Analytics and JP Morgan. 10
Jun-12 Nov-12 Apr-13 Sep-13 Feb-14 Jul-14 Dec-14 May-15 Oct-15 Considering the environment of weak growth and low inflation worldwide, the monetary policy stance in most economies is expected to remain accommodative over the next quarters. Advanced Economies Implied Monetary Policy Rates in OIS Curves 1/ % Implied target rate in OIS ECB target rate Federal Reserve target rate Bank of England target rate Bank of Japan target rate Dec Dec 2015 1.4 1.2 1.0 0.8 0.6 0.4 0.2 Germany 10-Year Interest Rates % United States United Kingdom 4.5 4.0 3.5 3.0 2.5 2.0 1.5 1.0 0.0-0.2 Japan 0.5 0.0 1/ OIS: Overnight Index Swap. Source: Bloomberg with estimates of Banco de México. Source: Bloomberg. 11
Commodity prices have dropped, as a reflection of a weak global demand, of supply factors, and the USD appreciation. Commodities Prices Index 03-Jan-2006 = 100 November 290 Agricultural products 260 230 200 Oil 170 140 Metals 110 80 Source: Standard & Poor s. 12
Jan-13 Mar-13 May-13 Jul-13 Sep-13 Nov-13 Jan-14 Mar-14 May-14 Jul-14 Sep-14 Nov-14 Jan-13 Mar-13 May-13 Jul-13 Sep-13 Nov-13 Jan-14 Mar-14 May-14 Jul-14 Sep-14 Nov-14 Jan-13 Mar-13 May-13 Jul-13 Sep-13 Nov-13 Jan-14 Mar-14 May-14 Jul-14 Sep-14 Nov-14 As indicated before, the USD exchange rate against the main currencies appreciated significantly. Dollar Index (DXY) 1/ Index 01-Jan-=100 Advanced Economies: Nominal Exchange Rates 110 107 104 101 98 95 92 89 Euro Euro per USD Yen Yen per USD Depreciation Depreciation Depreciation November November November 86 0.70 0.82 0.80 0.78 0.76 0.74 0.72 125 120 115 110 105 100 95 90 85 80 1/ DXY index is estimated by the Intercontinental Exchange (ICE) based on the weighted geometric mean of the dollar's value compared with a basket of 6 other major currencies which are: EUR: 57.6%, JPY: 13.6%, GBP:11.9%, CAD: 9.1%, SEK: 4.2%, and CHF: 3.6%. Source: Bloomberg. Source: Bloomberg. Source: Bloomberg. 13
Jan-13 Mar-13 May-13 Jul-13 Sep-13 Nov-13 Jan-14 Mar-14 May-14 Jul-14 Sep-14 Nov-14 Jan-13 Mar-13 May-13 Jul-13 Sep-13 Nov-13 Jan-14 Mar-14 May-14 Jul-14 Sep-14 Nov-14 Concern over the world economic outlook and uncertainty regarding a possible response of the monetary policy in advanced economies generated a strong rebound in volatility in international financial markets and currency depreciations in emerging economies. Implied Volatility in Exchange Rate Options % 17 15 Nominal Exchange Rate against USD Index 01-Jan- = 100 Depreciation South Africa 136 132 128 Emerging 1/ 13 11 Chile Brazil 124 120 116 112 9 Colombia 108 104 Advanced 2/ 7 5 Korea Mexico 100 96 92 1/ Simple average of the implied volatility of one month exchange rate put options for: Brazil, Chile, Korea, India, Mexico, Peru, Poland, South Africa and Turkey. 2/ JP Morgan s FX implied volatility index for G7 countries (Canada, France, Germany, Italy, Japan, U.K. and U.S.). Source: Bloomberg. Source: Bloomberg. 14
Outline 1 2 Monetary Policy External Conditions 3 4 5 Economic Activity in Mexico Inflation Determinants Forecasts and Balance of Risks 15
2008 2008 In 3Q, economic activity in Mexico continued recovering, although at a more moderate pace with respect to 2Q. Economic Activity Indicators Index 2008 = 100, s.a. Industrial Activity Index 2008 = 100, s.a. 160 150 140 130 Total IGAE Services IGAE Industrial production 118 114 110 106 Electricity Manufactures 125 120 115 110 120 110 102 Construction 105 100 100 98 Mining 95 90 94 90 80 Agricultural IGAE August September 90 September 85 s.a./ Seasonally adjusted data. Source: Mexico s System of National Accounts (Sistema de Cuentas Nacionales), INEGI.. s.a./ Seasonally adjusted data. Source: Mexico s System of National Accounts (Sistema de Cuentas Nacionales), INEGI. 16
2007 2008 2007 2008 2007 2008 This performance mainly reflects the dynamism of external demand coming from the U.S. Total Total U.S Other September 190 175 160 145 130 115 100 85 70 Manufacturing Exports Index 2007=100, s.a. Automobile U.S. Total Other September 230 210 190 170 150 130 110 90 70 50 Non-automobile Other U.S. Total September 170 160 150 140 130 120 110 100 90 80 70 s.a./ Seasonally adjusted data. Source: Banco de México. s.a./ Seasonally adjusted data. Source: Banco de México. s.a./ Seasonally adjusted data. Source: Banco de México. 17
2008 2007 2008 2007 2008 During 3Q, domestic demand observed a weak improvement. Monthly Indicator of Private Consumption in the Domestic Market Index 2008=100, s.a. 115 Workers Remittances USD billion, s.a. 2.6 Consumer Confidence Index Jan-2003=100, s.a. 115 110 2.4 110 105 2.2 100 105 100 2.0 1.8 95 90 85 95 1.6 80 75 August 90 September 1.4 October 70 s.a./ Seasonally adjusted data. Source: INEGI. s.a./ Seasonally adjusted data. Source: Banco de México. s.a./ Seasonally adjusted data. Source: Banco de México and INEGI. 18
2007 2008 2007 2008 Gross fixed investment continued increasing mostly as a result of the dynamism of investment in national machinery and equipment. Investment and its Components Index 2008=100, s.a. Real Value of Production in Construction Index Jan-2008=100, s.a. National machinery and equipment Total 140 130 120 110 100 Public Private excluding housing August 140 120 100 Construction 90 Total 80 Imported machinery and equipment August 80 70 60 Private housing Private 60 40 s.a./ Seasonally adjusted data. Source: INEGI. s.a./ Seasonally adjusted data. Source: INEGI and seasonally adjusted by Banco de México in the case of public and private construction (private housing and private excluding housing). 19
2007 2008 2007 2008 2007 2008 Despite the gradual reactivation of economic activity, slack conditions persisted in the labor market, although they seem to be decreasing. IMSS-insured Workers and Employed Population Index =100, s.a. 109 National Unemployment Rate % of EAP, s.a. 7 Labor Informality Rate % of employed population, s.a. 62 IMSS-insured workers 1/ 106 103 6 61 60 Employed population 2/ 100 97 5 59 94 4 58 October 3Q 91 88 85 September 3 2 September 57 56 55 s.a./ Seasonally adjusted. 1/ Permanent and temporary workers in urban areas. Seasonally adjusted by Banco de México. 2/Calculated by Banco de México with data from INEGI. Source: IMSS and INEGI (SCNM and ENOE). EAP/ Economically Active Population. s.a./ Seasonally adjusted. Source: National Employment Survey (Encuesta Nacional de Ocupación y Empleo), INEGI. s.a./ Seasonally adjusted. Source: Seasonally adjusted by Banco de México with data from the National Employment Survey (Encuesta Nacional de Ocupación y Empleo), INEGI. 20
I-2007 I-2008 I- I- I- I- I- I- I-1993 I-1996 I-1999 I-2002 I-2005 I-2008 I- II- Notwithstanding, unit labor costs in the economy as a whole keep declining. Productivity and Unit Labor Cost in the Economy Index 2008=100, s.a. 108 Total Factor Productivity and Labor Productivity in the Economy and in the Manufacturing Sector 2/ Indices IV-2006=100, s.a. 130 Productivity 1/ 103 Total factor productivity 120 110 98 100 Unit labor cost 93 Labor productivity in the economy 90 80 88 Labor productivity in the manufacturing sector 70 60 2Q 83 2Q 50 s.a./ Seasonally adjusted and trend data. 1/ Productivity based on the amount of hours worked. Source: INEGI, The Global Index of Labor Productivity in the Economy (IGPLE). Unit cost prepared by Banco de México based on data from INEGI. s.a./ Seasonally adjusted and trend data. 2/ The total factor productivity was estimated as the Solow residual of a regression in logs of GDP versus labor and capital stock. Labor productivity is based on the amount of hours worked. Source: Prepared by Banco de México with data from IGPLE, EMIM and industrial activity data from Mexico s System of National Accounts (Sistema de Cuentas Nacionales), INEGI. 21
Outline 1 2 Monetary Policy External Conditions 3 4 5 Economic Activity in Mexico Inflation Determinants Forecasts and Balance of Risks 22
Jan-06 Jul-06 Jan-07 Jul-07 Jan-08 Jul-08 Jan-09 Jul-09 Jan-10 Jul-10 Jan-11 Jul-11 Jan-12 Jul-12 Jan-13 Jul-13 Jan-14 Jul-14 In 3Q, annual headline inflation exceeded 4 percent triggered by transitory shocks. Consumer Price Index Annual % change October 13 12 11 Non-core 10 9 8 7 Headline 6 5 Variability interval Core 4 3 2 1 Source: Banco de México and INEGI. 23
Jan-09 May-09 Sep-09 Jan-10 May-10 Sep-10 Jan-11 May-11 Sep-11 Jan-12 May-12 Sep-12 Jan-13 May-13 Sep-13 Jan-14 May-14 Sep-14 Jan-09 May-09 Sep-09 Jan-10 May-10 Sep-10 Jan-11 May-11 Sep-11 Jan-12 May-12 Sep-12 Jan-13 May-13 Sep-13 Jan-14 May-14 Sep-14 Core inflation increased, mostly due to the performance of the food merchandise group, given that some goods derived from livestock products increased their prices. Merchandise Core Price Index Annual % change October 10 9 Services October 8 7 Food, beverages and tobacco 8 7 Education (tuiton) 6 5 Merchandise 6 5 Services 4 3 Non-food merchandise 4 3 2 1 Other services Housing 2 1 0-1 0-2 Source: Banco de México and INEGI. Source: Banco de México and INEGI. 24
Jan-09 May-09 Sep-09 Jan-10 May-10 Sep-10 Jan-11 May-11 Sep-11 Jan-12 May-12 Sep-12 Jan-13 May-13 Sep-13 Jan-14 May-14 Sep-14 Jan-09 May-09 Sep-09 Jan-10 May-10 Sep-10 Jan-11 May-11 Sep-11 Jan-12 May-12 Sep-12 Jan-13 May-13 Sep-13 Jan-14 May-14 Sep-14 The fading of the high comparison base effect in the subindex of fruits and vegetables, together with higher prices of some meat products generated an increment in non-core inflation in 3Q. Agricultural Non-core Price Index Annual % change Energy and Government Approved Fares Agricultural Livestock Fruit and vegetables October 30 27 24 21 18 15 12 9 6 3 0-3 -6-9 -12-15 Energy and government approved fares Energy Government approved fares October 15 12 9 6 3 0-3 Source: Banco de México and INEGI. Source: Banco de México and INEGI. 25
Jan-06 Jun-06 Nov-06 Apr-07 Sep-07 Feb-08 Jul-08 Dec-08 May-09 Oct-09 Mar-10 Aug-10 Jan-11 Jun-11 Nov-11 Apr-12 Sep-12 Feb-13 Jul-13 Dec-13 May-14 As a result of the evolution of economic activity the output gap, that persists at negative levels, is estimated to continue closing over the next quarters. Output Gap 1/ % of potential output, s.a. 8.0 6.0 4.0 GDP IGAE 2.0 0.0-2.0-4.0-6.0 July August -8.0-10.0 s.a./ Calculated with seasonally adjusted data. 1/ Estimated using the Hodrick-Prescott (HP) filter with tail correction method; see Banco de México (), Inflation Report April June, p.69. The shaded area is the 95% confidence interval of the output gap, calculated with an unobserved components method. Source: Calculated by Banco de México with data from INEGI. 26
2005 Long-term inflation expectations implicit in market instruments remain around 3 percent, while those based on surveys are stable. 2006 2007 2008 Break-even Inflation Decomposition 1/ % Break-even inflation implicit in 10- year bonds Long-term inflation expectation Inflationary risk premium 3.22 3.20 0.02 7.0 6.0 5.0 Annual Headline Inflation Expectations Median, % Next 4 years End of 5.0 4.5 4.0 4.0 3.5 Next 5-8 years End of 2015 3.0 3.0 2.0 Variability interval 2.5 1.0 2.0 October 0.0 October 1.5 1/ The inflation risk premium is calculated with an affine model as described in Aguilar, Elizondo and Roldán () with data from Valmer and Bloomberg. Source: Banco de Mexico s Survey. 27
Jan-12 The exchange rate has adjusted in an orderly manner, despite higher volatility in financial markets. Jun-12 Nov-12 Apr-13 Sep-13 Feb-14 Jul-14 Nov-14 Jan-12 Jun-12 Nov-12 Apr-13 Sep-13 Feb-14 Jul-14 Nov-14 2008 Exchange Rate and its Expectations for the End of and 2015 1/ Pesos per dollar 14.5 Implied Volatility in Foreign Exchange Rate Options 2/ % 18 Traded Volume in the Foreign Exchange Market Index 02-Jul-2008=100 200 Observed 13.54 14.0 13.5 16 14 Moving Average 20 Days 180 160 140 13.0 12 120 12.5 10 100 80 End of End of 2015 13.33 13.17 November 12.0 11.5 11.0 November 8 6 4 November 60 40 20 0 1/ The observed exchange rate is the daily FIX exchange rate. The latest data for the observed exchange rate is November 18,, and the foreign exchange rate forecasts is October. Source: Banco de México and Banamex survey. 2/ It refers to implied volatility in 1-month options. Source: Bloomberg. Source: Banco de México and Reuters. 28
2007 2008 2007 2008 Interest rates and their spreads between Mexico and the U.S. increased marginally for practically all terms. Interest Rates of Government Securities 1/ % November 12 11 10 Spread between Mexico and U.S. Interest Rates Percentage points November 8.5 7.5 10 years 30 years 9 8 7 6 5 6 months 30 years 6.5 5.5 4.5 3.5 6 months 1 day 4 3 2 10 years 1 day 2.5 1.5 1/ Since January 21, 2008, the overnight interest rate corresponds to the target for the Overnight Interbank Interest Rate. Source: Banco de México and Proveedor Integral de Precios (PiP). Source: Banco de México, Proveedor Integral de Precios (PiP) and U.S. Department of the Treasury. 29
Mar-14 Jun-14 Sep-14 Dec-14 Mar-15 Jun-15 Sep-15 Dec-15 The above has been reflected in a slight steepening of the yield curve, particularly derived from higher medium- and long-term rates. Government Bond Yield Curve % 30-Jun-14 8.0 7.5 7.0 Expectations for the Overnight Interbank Interest Rate % 5.0 4.5 31-Mar-14 18-Nov-14 6.5 6.0 5.5 5.0 4.5 4.0 Observed May June October 4.0 3.5 3.0 3.5 2.5 3.0 1 1 3 6 12 2 3 5 10 20 30 2.5 2.0 Day Months Years Source: Banco de México and Proveedor Integral de Precios (PiP). Source: Banco de México survey. 30
Outline 1 2 Monetary Policy External Conditions 3 4 5 Economic Activity in Mexico Inflation Determinants Forecasts and Balance of Risks 31
9 8 7 6 5 4 3 2 1 0-1 -2-3 -4-5 -6-7 -8-9 GDP Growth Between 2.0 and 2.5% 2015 Between 3.0 and 4.0% 2016 Between 3.2 and 4.2% Q2 Q4 Q2 Q4 Q2 Q4 Q2 Q4 Q2 Q4 Q2 Q4 Q2 Q4 Q2 Q4 Q2 Q4 2008 2015 2016 s.a./ Seasonally adjusted data. Source: INEGI and Banco de México. GDP Growth Annual %, s.a. Q4 Economic Activity Outlook 2015 Q4 2016 Q4 Fan Charts 9 8 7 6 5 4 3 2 1 0-1 -2-3 -4-5 -6-7 -8-9 7 6 5 4 3 2 1 0-1 -2-3 -4-5 -6-7 Increase in the number of IMSS-insured workers Between 640 and 710 thousand 2015 Between 620 and 720 thousand 2016 Between 640 and 740 thousand Output Gap % of potential output, s.a. Q2 Q4 Q2 Q4 Q2 Q4 Q2 Q4 Q2 Q4 Q2 Q4 Q2 Q4 Q2 Q4 Q2 Q4 2008 2015 2016 s.a./ Seasonally adjusted data. Source: INEGI and Banco de México. Q4 2015 Q4 2016 Q4 32 7 6 5 4 3 2 1 0-1 -2-3 -4-5 -6-7
Risks to the Growth Outlook: Upward: A more vigorous than anticipated economic recovery in the U.S. A rapid implementation of the first stages of structural reforms, in particular the energy reform, could propitiate a greater than anticipated investment. Downward: Lower than foreseen expansion of the world economy, particularly in the U.S. Risk that oil production platform does not stabilize and continues falling. Increased uncertainty in international financial markets. Uncertainty generated by recent social events that could affect economic activity. 33
2016 2015 Inflation Outlook Headline Inflation Core Inflation Recent transitory impact by shocks in relative prices. Annual headline inflation is expected to decline in November and December and to conclude the year around 4 percent. It is anticipated to remain close to 3 percent for the rest of. In early 2015, annual headline inflation is expected to reduce considerably and to remain around 3 percent from the middle of the year onwards. It is expected to lie below 3 percent in 2015. It is anticipated to locate at levels close to 3 percent. It is estimated to be close to 3 percent. 34
The monetary policy stance, as well as the fading of the effect derived from the fiscal changes in, the elimination of the long-distance national phone charges and a lower increment in gasoline prices will contribute to the fact that inflation will lie at levels around 3 percent from mid-2015 onwards. Fan Charts 7.0 6.5 6.0 5.5 Annual Headline Inflation 1/ % Q4 2015 Q4 2016 Q4 7.0 6.5 6.0 5.5 7.0 6.5 6.0 5.5 Annual Core Inflation 1/ % Q4 2015 Q4 2016 Q4 7.0 6.5 6.0 5.5 5.0 5.0 5.0 5.0 4.5 4.5 4.5 4.5 4.0 4.0 4.0 4.0 3.5 3.5 3.5 3.5 3.0 3.0 3.0 3.0 2.5 2.5 2.5 2.5 2.0 2.0 2.0 2.0 1.5 Observed 1.5 1.5 Observed 1.5 1.0 0.5 Headline inflation target Variability interval 1.0 0.5 1.0 0.5 Headline inflation target Variability interval 1.0 0.5 0.0 Q2Q4Q2Q4Q2Q4Q2Q4Q2Q4Q2Q4Q2Q4Q2Q4Q2Q4Q2Q4Q2Q4 2006 2008 2015 2016 0.0 0.0 Q2Q4Q2Q4Q2Q4Q2Q4Q2Q4Q2Q4Q2Q4Q2Q4Q2Q4Q2Q4Q2Q4 2006 2008 2015 2016 0.0 1/ Quarterly average of annual headline inflation. Source: INEGI and Banco de México. 2/ Quarterly average of annual core inflation. Source: INEGI and Banco de México. 35
Inflation trajectory could be affected by certain risks: Downward Upward A lower than anticipated recovery of economic activity. Episodes of higher volatility in international financial markets. Greater decreases in the prices of telecommunication services. Increments in minimum wages that are higher than the expected inflation and the increase in productivity. 36
Monetary Policy Stance The Board of Governors maintained the target for the Overnight Interbank Interest Rate at 3.0 percent, by virtue of the fact that it estimated the monetary policy stance to be congruent with the efficient convergence of inflation to its 3 percent target. In the future, the Board will monitor the performance of all determinants of inflation, as well as its expectations for the medium and long terms. In particular, the Board will monitor: The evolution of the degree of slack in the economy in light of the foreseen recovery, including the possible effects of the implementation of structural reforms on aggregate supply and demand of the Mexican economy. The monetary policy stance of Mexico relative to that of the U.S. All of the above to reach the referred inflation target. 37
It is encouraging that the legislative stage of the recent process of structural reforms has concluded. It is necessary to guarantee their proper implementation. However, currently it is particularly important to significantly improve the institutional framework of Mexico in order to: Improve the efficiency of the economy in general. Enhance the beneficial effects of the structural reforms on the potential growth, employment and welfare of the population. This requires an institutional transformation that would improve the rule of law, legal certainty and, in general, the strength of the institutions, which will result in: Greater social harmony. A more appropriate use of the benefits derived from structural reforms. Better distribution of the said benefits in the society. 38