Quarterly Report July - September November 23,
Outline 1 Monetary Policy 2 External Conditions 3 Evolution of the Mexican Economy 4 Inflation and its Determinants 5 Forecasts and Final Remarks Quarterly Report July - September 2
Conduction of Monetary Policy The Mexican economy is one of the most integrated with the global economy, and, in particular, with that of the U.S. Even if this has yielded considerable benefits, the domestic economy and financial markets have become more vulnerable to external events. During the period covered by this Report, the Mexican economy faced a complex juncture. The outlook for the world economy became more challenging as a consequence of the electoral process in the U.S. and its outcome, among other factors. National financial markets were particularly hit by this events, registering a fall in asset prices and high volatility. So far, the preemptive measures that Banco de México has adopted along this year have prevented headline inflation and its expectations from being affected by the referred factors. Quarterly Report July - September 3
It is still difficult to identify the elements that will define the economic policy stance of the U.S. regarding its bilateral relation with Mexico starting from 2017. The Mexican authorities will continue to act cautiously and keeping a medium and longer term perspective. In the short run, they will continue to carefully monitor the evolution of national financial markets, so as to take the necessary measures to maintain its sound functioning, in a coordinated manner. Mexico is in a strong position to face this new environment, as a result of: Actual and expected achievements in terms of public finance consolidation. Implementation of preemptive monetary policy measures during the year. A well-capitalized, solvent, and adequately liquid financial system. An unprecedented structural reform process. Nonetheless, it is inevitable to continue handling actual and emerging risks by further strengthening the macroeconomic fundamentals of the country. Quarterly Report July - September 4
Banco de México continued acting with full flexibility, and at the moment and extent required by the prevailing conditions, in order to offset inflationary pressures and to maintain inflation expectations anchored. August 11, September 29, Rate unchanged at 4.25 percent. 50 bp increment to 4.75 percent. As volatility in financial markets in Mexico spiked, negatively affecting the dynamics of the national currency and, thus, endangering the anchoring of inflation expectations. November 17, 50 bp increment to 5.25 percent. As the national economy faces an environment characterized by increased uncertainty and a possibly permanent real shock, as well as to the deterioration of the balance of risks for inflation. Quarterly Report July - September 5
2003 2004 2005 2006 2007 So far, in Banco de México has preemptively increased the Overnight Interbank Interest Rate by 200 basis points, in view of an increasingly adverse external environment. Monetary Policies Rates % November 10 Mexico: Target for the Overnight Interbank Interest Rate 1/ 8 6 4 U.S.: Target Federal Funds Rate 2/ 2 0 1/ Before January 20, it refers tothe observed Overnight Interbank Interest Rate. 2/ The upper limit of the target range is showed. Source: Federal Reserve and Banco de México. Quarterly Report July - September 6
Outline 1 Monetary Policy 2 External Conditions 3 Evolution of the Mexican Economy 4 Inflation and its Determinants 5 Forecasts and Final Remarks Quarterly Report July - September 7
External Conditions The outlook for the world economy became more complex as a consequence of the electoral process in the U.S. and its outcome, among other factors. This led to increased financial market volatility in all regions. Capital inflows to emerging economies started to revert. Interest rates exhibited an upward trend, both in advanced and emerging economies. Despite some signs of a moderate recovery of the world economy in Q3, the possible implementation of measures that could hamper foreign trade and foreign investment led to a deterioration in the balance of risks for the global growth. Quarterly Report July - September 8
2017 2000 2002 2005 In Q3, world economic activity recovered moderately, supported by greater growth in the U.S. and other advanced economies, as well as by a continuous expansion of some of the main emerging economies. GDP Growth Forecasts Annual % change WEO October WEO July Forecasts World Economy 8 Trade of Goods 1/ Annual % change, s. a. 25 20 World Emerging 6 4 2 15 10 5 0-5 -10-15 Advanced 0 August -20-25 Source: IMF, WEO July and October,. 1/ Refers to the sum of imports and exports. s. a. / Seasonally adjusted data. Source: CPB Netherlands. Quarterly Report July - September 9
2007 Jan-15 Mar-15 May-15 Jul-15 Sep-15 Nov-15 Jan-16 Mar-16 May-16 Jul-16 Sep-16 Nov-16 In the U.S., economic activity rebounded in Q3. Although inflation remains low, inflation expectations spiked, largely in response to the expectation of an expansionary fiscal policy that would be, in principle, carried out by the incoming administration of the U.S. 11 10 9 8 Change in Non-farm Payrolls and Unemployment Rate Thousands of jobs and % of EAP, s. a. United States 600 400 200 Personal Consumption Expenditures Price Index and Inflation Expectations Annual % change Inflation Expectations 1/ 2.7 2.4 2.1 1.8 7 6 5 4 3 2 Unemployment Rate Change in Non-farm Payrolls October 0-200 -400-600 -800 PCE: Core PCE: Headline November September 1.5 1.2 0.9 0.6 0.3 0.0 EAP/ Economically Active Population. s. a. / Seasonally adjusted data. Source: Bureau of Labor Statistics (BLS). 1/ Expected inflation over the five-year period that begins five years from today. Obtained from swap contracts in which one counterparty agrees to pay a fixed rate in exchange for receiving a referenced payment at an inflation rate over a specified period. Source: JP Morgan. Quarterly Report July - September 10
Oct-13 Feb-14 Jun-14 Oct-14 Feb-15 Jun-15 Oct-15 Feb-16 Jun-16 Oct-16 Feb-17 Jun-17 Oct-17 Feb-18 Jun-18 Oct-18 Jan-16 Feb-16 Mar-16 Apr-16 May-16 Jun-16 Jul-16 Aug-16 Sep-16 Oct-16 Nov-16 Jan-15 Apr-15 Jul-15 Oct-15 Jan-16 Apr-16 Jul-16 Oct-16 In light of a higher expected inflation in the U.S., the markets perspective points to relatively faster and greater increments in the federal funds rate. Meanwhile, interest rates in the main advanced economies went up as of October. Advanced Economies: Expected Monetary Policy Rates 1/ % Dec.-16 Implied target rate in OIS curve November 7, Implied target rate in OIS curve November 22, Federal Reserve 2/ Bank of England ECB Main Refinancing Operations Bank of Japan ECB Deposit Facility Dec.-17 1.6 1.3 1.0 0.7 0.5 0.2-0.1-0.4-0.7 Advanced Economies: 10-Year Government Bond Interest Rates % United Kingdom Japan United States Euro Zone November 2.5 2.0 1.5 1.0 0.5 0.0-0.5 United States: DXY and Trade-Weighted US Dollar Index Index 01-Jan- = 100 Trade-Weighted Index (TWI) 4/ DXY 3/ November 115 112 109 106 103 100 97 1/ OIS: Fixed-For-Floating swap where the fixed interest rate is the reference rate. 2/ Data for the observed federal funds rate corresponds to the average between the lower and upper bounds of the range (0.25% - 0.5%). Source: Banco de México with data from Bloomberg. Source: Bloomberg. Quarterly Report July - September 3/ 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%. Base=100. 4/ Trade-Weighted Index of the Federal Reserve; main trade partners: China (21.3%), Euro Zone (16.38%), Canada (12.7%), Mexico (11.9%), Japan (6.9%), South Korea (3.9%), United Kingdom (3.35%). Source: Bloomberg. 11
2017 2018 International commodity prices presented a mixed performance during the period analyzed in this Report. Crude Oil Prices USD per barrel Futures 1/ 125 115 Commodity Prices Index 2005=100 260 240 WTI 105 95 220 200 85 75 65 55 Industrial Metals Food 180 160 140 120 Mexican Oil Mix 45 35 25 Total Energy 100 80 60 15 October 40 1/ Data up to November 22,. Source: Bloomberg. Source: International Monetary Fund. Quarterly Report July - September 12
Jan-15 Apr-15 Jul-15 Oct-15 Jan-16 Apr-16 Jul-16 Oct-16 1 4 7 10 13 16 19 22 25 28 31 34 37 40 43 46 49 52 Jan-15 Mar-15 May-15 Jul-15 Sep-15 Nov-15 Jan-16 Mar-16 May-16 Jul-16 Sep-16 Nov-16 Volatility in international financial markets rebounded in all regions, mainly as a reflection of events related to the electoral process in the U.S. Thus, capital inflows to emerging economies started to revert as of November and their currencies depreciated. Emerging Markets Currency Option Implied Volatility 1/ % Maximum Average Minimum Mexico November 35 30 25 20 15 10 5 Accumulated Capital Flows (Debt and Equity) 2/ Billions of dollars 16-Nov. 110 90 70 50 30 10-10 -30-50 -70-90 Colombia South Africa Nominal Exchange Rate against USD Index 01-Jan- = 100 Brazil Korea Chile Mexico November 160 150 140 130 120 110 100 90 1/ The minimum (maximum) value represents the lowest (highest) value in the volatility of a sample with currencies from Brazil, Chile, Colombia, Turkey, South Africa, South Korea and Indonesia. Source: Bloomberg. Weeks 2/ The sample covers funds used for the buying-selling of stocks and bonds from emerging countries, recorded in advanced countries. Flows exclude portfolio performance and changes in the exchange rate. Source: Emerging Portfolio Fund Research. Source: Bloomberg. Quarterly Report July - September 13
Outline 1 Monetary Policy 2 External Conditions 3 Evolution of the Mexican Economy 4 Inflation and its Determinants 5 Forecasts and Final Remarks Quarterly Report July - September 14
-3.9-1.9-1.0-0.8-0.1 0.2 0.1 0.4 0.4 0.5 0.9 0.8 1.0 0.9 0.8 0.7-7.9-5.2-4.6-1.1-1.0 1.0 1.6 0.9 0.4 0.7 0.6 0.8 0.6 0.5 0.5 2.2 1.8 1.6 1.1 2.3 1.8 2.3 2.7 2.8 2.5 2.8 2.4 2.3 2.6 2.0 1.1 1.0 1.0 3.1 3.2 1.3 1.4 1.5 3.7 3.2 3.6 1.7 1.5 4.6 4.5 4.2 4.3 4.9 4.5 2.1 5.4 6.7 In Q3, the Mexican economy recovered moderately. Gross Domestic Product Quarterly % change, s. a. 4 Annual % change 9 3 2 6 0.1 0.6 1 3 0-1 0-2 -3-3 -4-6 Q3-5 Q3-9 s. a. / Seasonally adjusted data. Source: Mexico s System of National Accounts, INEGI. Quarterly Report July - September 15
This recovery reflected the reactivation shown by the services sector, while industrial production, overall, remained stagnant. 170 160 150 140 130 120 Global Indicator of Economic Activity Index =100, s. a. Industrial Total Services 130 125 120 115 110 Industrial Activity Index =100, s. a. Manufacturing Electricity Total 140 130 120 110 Global Indicator of Economic Activity: Services Index =100, s. a. Financial and Real Estate Transport and Mass Media 150 140 130 120 110 110 100 90 80 Agricultural 105 100 95 Construction Mining 100 90 Trade Leisure and Others 100 90 80 70 September 90 September 80 September 70 s. a. / Seasonally adjusted data. Source: Mexico s System of National Accounts, INEGI. s. a. / Seasonally adjusted data. Source: Monthly Indicator of Industrial Activity, Mexico s System of National Accounts, INEGI. s. a. / Seasonally adjusted data. Source: Mexico s System of National Accounts, INEGI. Quarterly Report July - September 16
2007 2007 In Q3, manufacturing exports in Mexico recovered, after showing a negative trend throughout and early. Crude oil exports also increased. Manufacturing Exports Index =100, s. a. Oil Exports and Crude Oil Export Platform Index =100, s. a. 170 150 U.S. 160 150 Oil Exports 140 130 120 Rest of the World Total 140 130 120 110 100 Crude Oil Exports Platform 1/ 110 100 90 80 70 60 September 90 80 70 September 50 40 30 20 s. a. / Seasonally adjusted data based on information in nominal dollars. Source: Banco de México with data from SAT, SE, Banco de México, INEGI. Merchandise Trade Balance, SNIEG. Information of National Interest. s. a. / Seasonally adjusted data based on information in nominal dollars. 1/ 3-month moving average of daily barrels of the seasonally adjusted series. Source: SAT, SE, Banco de México, INEGI. Merchandise Trade Balance, SNIEG. Information of National Interest, and Banco de México with data from PMI Comercio Internacional, S.A. de C.V. Quarterly Report July - September 17
2000 2001 2002 2003 2004 2005 2006 2007 Q1- Q2- Q3-2007 1993 1995 1997 1999 2001 2003 2005 2007 The current account seems to have stabilized, reflecting, in part, that the non-oil trade balance has apparently started to improve, after its deficit expanded from to. Indeed, the accumulated deficit of this balance over the first three quarters of, has been the lowest since 1996. Current Account 1/ % of GDP 1.0 Trade Balance USD millions 8,000 Non-oil Trade Balance January-September of each year, USD millions 5,000 0.0-1.0 Oil Total 6,000 4,000 2,000 0 0-5,000-10,000-2.0-2,000-15,000-3.0 Non-Oil -4,000-6,000-8,000-20,000-25,000 Q3-4.0 Q3-10,000 Sep -30,000 1/ Data for Q3 correspond to Banco de México s estimate. Source: Banco de México and INEGI. Source: SAT, SE, Banco de México, INEGI. Merchandise Trade Balance, SNIEG. Information of National Interest. Source: SAT, SE, Banco de México, INEGI. Merchandise Trade Balance, SNIEG. Information of National Interest. Quarterly Report July - September 18
Private consumption resumed its upward trajectory, consistent with the improvement in the real wage bill. It also benefitted from the continued and rapid expansion of consumer credit, as well as from higher flows of remittances. Domestic Private Consumption 1/ and Commercial Retail Business Revenues Index =100; s. a. 125 Commercial Banks Consumer Performing Credit 2/ Real annual % change 50 2.8 Workers Remittances USD billions and constant MXN billions; s. a. 42.0 Private Consumption 120 115 110 Personal Payroll 40 30 2.6 2.4 USD Pesos 6/ 37.0 32.0 105 Total 3/ 20 2.2 27.0 Retail Revenues 100 95 ACD 4/ 5/ 10 0 2.0 1.8 22.0 17.0 August 90 Credit Cards September -10 1.6 September 12.0 s. a. / Seasonally adjusted data. 1/ The Monthly Indicator of Private Consumption measures the performance of spending by resident households in the country on consumer goods and services of national and external origin. It does not include net purchases in foreign markets and imported services. Source: EMEC and SCNM, INEGI. 2/ Itincludes Sofomes ERsubsidiaries of bank institutions and financial groups. 3/ It includes credit for payable leasing operations and other consumer credits. 4/ From July onwards, figures are adjusted in order to avoid distortions due to the reclassification from acquisition of consumer durables to other consumer credits by one banking institution. 5/ It includes credit for movable property acquisition and auto loans. Source: Banco de México. Quarterly Report July - September s. a. / Seasonally adjusted data. 6/ Prices as of the second fortnight of December. Source: Banco de México. 19
2007 During the reported quarter, weakness in gross fixed investment persisted. Investment and its Components Index =100, s. a. 160 Real Value of Production in the Construction Industry by Contracting Institutional Sector 1/ Index January =100, s. a. 150 National Machinery and Equipment 150 140 130 130 Public Total 120 110 Total 110 100 90 Imported Machinery and Equipment Construction August 90 80 70 60 Private August 70 50 s. a./ Seasonally adjusted data. Source: Mexico s System of National Accounts, INEGI. Quarterly Report July - September s. a./ Seasonally adjusted data. 1/ Seasonally adjusted by Banco de México, except the total. Source: Calculated by Banco de México with data from ENEC, INEGI. 20
2006 2007 No significant price pressures coming from aggregate demand were observed. Output Gap 1/ % of potential output; s. a. 8 6 4 2 GDP 0 IGAE -2-4 -6 September Q3-8 -10 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. Quarterly Report July - September 21
2007 2007 2007 In Q3, overall labor market conditions seemed to have continued gradually improving. IMSS-Insured Jobs, Employed Population and Total IGAE Index =100, s. a. 120 National Unemployment Rate % of EAP, s. a. 6.5 Real Total Wage Bill Index Q1- =100, s. a. 120 115 6.0 115 IMSS-affiliated Jobs 1/ 110 105 5.5 5.0 Employed Salaried Population Real Wage Bill 110 105 100 Employed Population Total IGAE Q3 September October 100 95 90 85 September 4.5 4.0 3.5 3.0 Real Average Income Q3 95 90 85 80 s. a. / Seasonally adjusted data. 1/ Permanent and temporary workers in urban areas. Seasonally adjusted by Banco de México. Source: Calculated by Banco de México with data from IMSS and INEGI (SCNM and ENOE). EAP/ Economically Active Population. s. a. / Seasonally adjusted data. Source: National Employment Survey (Encuesta Nacional de Ocupación y Empleo), INEGI. s. a. / Seasonally adjusted data. Source: Elaborated by Banco de México with data from National Employment Survey (Encuesta Nacional de Ocupación y Empleo), INEGI. Quarterly Report July - September 22
Outline 1 Monetary Policy 2 External Conditions 3 Evolution of the Mexican Economy 4 Inflation and its Determinants 5 Forecasts and Final Remarks Quarterly Report July - September 23
2003 2004 2005 2006 2007 As of September, annual headline inflation registered 17 consecutive months at levels under 3 percent, although in October it lied slightly above this figure. Consumer Price Index Annual % change October 13 12 Non-Core 11 10 9 8 7 6 Headline 5 4 Variability Interval Core 3 2 1 Source: Banco de México and INEGI. Quarterly Report July - September 24
The performance of core inflation is mainly explained by the evolution of the merchandise price sub-index, which responded to the depreciation of the national currency. Merchandise and Services Core Price Index Annual % change 10 Merchandise 10 9 8 7 Food 9 8 7 Merchandise 6 5 4 3 6 5 4 3 Services 2 1 Non-food 2 1 October 0 October 0 Source: Banco de México and INEGI. Source: Banco de México and INEGI. Quarterly Report July - September 25
Higher non-core inflation largely derived from increments in gasoline prices, which were partially offset by drops in the L.P. gas prices. Non-Core Index Annual % change Agriculture Energy and Government Approved Fares October 30 27 October Enero 15 Agriculture Livestock 24 21 18 15 Energy and Government Approved Fares 12 9 12 9 6 Energy 6 3 0 3-3 Fruits and Vegetables -6-9 -12-15 Government Approved Fares 0-3 Source: Banco de México and INEGI. Quarterly Report July - September Source: Banco de México and INEGI. 26
Long-term inflation expectations derived from surveys and from market instruments remain around 3 percent. 2007 Headline Inflation Expectations for Different Terms Median, % 5.0 4.5 Next 4 years End of End of 2017 4.0 3.5 Next 5-8 years Long-term (Market Instruments) 1/ 3.0 2.5 Variability Interval 2.0 October 1.5 1/ For a description of the estimation of log-term inflation expectations, see the Box Decomposition of Break-even Inflation in the Quarterly Report, October December. For the current Report, the estimate was updated by including data as of December. Source: Banco de México. Quarterly Report July - September 27
Jan-14 Apr-14 Jul-14 Oct-14 Jan-15 Apr-15 Jul-15 Oct-15 Jan-16 Apr-16 Jul-16 Oct-16 Jan-14 Apr-14 Jul-14 Oct-14 Jan-15 Apr-15 Jul-15 Oct-15 Jan-16 Apr-16 Jul-16 Oct-16 Episodes of high volatility in financial markets, mainly related to the electoral process in the U.S., led to high volatility and a considerable depreciation of the national currency. Nominal Exchange Rate 1/ Pesos per USD Observed Exchange Rate(last data 22-Nov) 20.52 Depreciation 21.5 20.5 19.5 Currency Option Implied Volatility 2/ % 29 27 24 18.5 22 17.5 16.5 15.5 19 17 14 12 14.5 9 13.5 7 November 12.5 November 4 1/ Refers to FIX Exchange rate. The black vertical line indicates January 1, and the dotted line indicates September 29,. Source: Banco de México. 2/ Currency option implied volatility refers to one-month options. The black vertical line indicates January 1, and the dotted line indicates September 29,. Source: Bloomberg. Quarterly Report July - September 28
Regarding the bond market performance, following the announcement of the results in the U.S. elections, the upward trend in interest rates sharply strengthened, especially along the longer end of the yield curve. Government Bond Interest rates 1/ % Yield Curve % 10 8.0 9 7.5 30 years 8 7 22-Nov-16 7.0 6.5 6.0 3 months 2 years 10 years 1 year 1 day 6 months November 6 5 4 3 2 30-Sep-16 30-Jun-16 31-Mar-16 1 1 3 6 1 2 3 5 10 20 30 5.5 5.0 4.5 4.0 3.5 3.0 2.5 1/ Since January 21,, the one-day (overnight) interest rate corresponds to the target for the Overnight Interbank Interest Rate. Source: Banco de México and Proveedor Integral de Precios (PiP) Day Quarterly Report July - September Months Years Source: Banco de México and Proveedor Integral de Precios (PiP). 29
Jan-15 Mar-15 May-15 Jul-15 Sep-15 Nov-15 Jan-16 Mar-16 May-16 Jul-16 Sep-16 Nov-16 Even though the operating conditions in the national bond markets deteriorated recently, government securities holdings by non-residents remained stable at levels close to historic maximums. Mexico and United States Interest Rate Spreads 1/ Percentage points 6.0 Government Securities Holdings by Foreign Investors 2/ MXN billion 2,500 5.5 5.0 Total 2,000 10 years 2 years 30 years 6 months 1 day 4.5 4.0 3.5 Bonds 1,500 1,000 3 months 1 year 3.0 2.5 CETES 500 November 2.0 November 0 1/ The United States objective rate is the average of the interval considered by the Federal Reserve. Source: Proveedor Integral de Precios (PiP) and U.S. Treasury Department. 2/ The total includes CETES, bonds, udibonos, bondes and bondes D. Source: Banco de México. Quarterly Report July - September 30
Outline 1 Monetary Policy 2 External Conditions 3 Evolution of the Mexican Economy 4 Inflation and its Determinants 5 Forecasts and Final Remarks Quarterly Report July - September 31
Economic Activity Outlook GDP Growth (%) Report Previous Revised 1.7-2.5 1.8-2.3 2017 2.0-3.0 1.5 2.5 2018 -- 2.2-3.2 Increase in the number of IMSS-insured jobs (Thousands) Report Previous Revised 590-690 640-710 2017 610-710 600-700 2018 -- 650-750 Current Account Deficit (% of GDP) Report Previous Revised 3.1 3.0 2017 3.2 3.0 2018 -- 3.0 7 6 5 4 3 2 1 0-1 -2-3 -4-5 -6-7 s. a. / Seasonally adjusted data. Source: Banco de México. Fan Chart: Output Gap % of potential output, s. a. Quarterly Report July - September 32 Q4 2017 Q4 2018 Q4 Q2 Q4 Q2 Q4 Q2 Q4 Q2 Q4 Q2 Q4 Q2 Q4 Q2 Q4 Q2 Q4 Q2 Q4 Q2 Q4 Q2 Q4 2017 2018 7 6 5 4 3 2 1 0-1 -2-3 -4-5 -6-7
Risks to the Growth Outlook Upward: That the implementation of structural reforms would have a more positive impact on the economic growth and will be faster than anticipated. That, in view of the recent depreciation of the exchange rate, non-oil exports would exhibit a more noticeable and lasting recovery, which would further boost industrial production. Downward: That the new administration of the U.S. would indeed implement policies that could hamper the functioning of shared production chains between Mexico and the U.S. Persisting episodes of high volatility in international financial markets, which would reduce the sources of financing or foreign investment to Mexico. That the deterioration that had been observed in consumers and investors confidence levels would persist, affecting private consumption and investment. Quarterly Report July - September 33
2018 2017 Inflation Outlook Headline inflation Core inflation It will gradually increase and will lie slightly above 3 percent by the end of the year. It is forecast to close the year moderately above 3 percent. It will be above the inflation target, although within the variability interval. It will be close to levels around 3 percent by the end of the year. Quarterly Report July - September 34
Annual inflation is forecast to lie slightly over 3 percent by the end of the year. For 2017, it is anticipated to be above the inflation target, although below the upper limit of the variability interval, getting close to levels around 3 percent by the end of 2018. 7.0 6.5 6.0 5.5 5.0 4.5 4.0 3.5 3.0 2.5 2.0 1.5 1.0 0.5 0.0 Observed Headline Inflation Target Variability Interval Q2Q4Q2Q4Q2Q4Q2Q4Q2Q4Q2Q4Q2Q4Q2Q4Q2Q4Q2Q4Q2Q4Q2Q4Q2Q4 2006 2007 2017 2018 1/ Quarterly average of annual headline inflation. Source: Banco de México and INEGI. Annual Headline Inflation 1/ % Q4 2017 Q4 2018 Q4 Fan Charts 7.0 6.5 6.0 5.5 5.0 4.5 4.0 3.5 3.0 2.5 2.0 1.5 1.0 0.5 0.0 7.0 6.5 6.0 5.5 5.0 4.5 4.0 3.5 3.0 2.5 2.0 1.5 1.0 0.5 0.0 Quarterly Report July - September Annual Core Inflation 2/ % Observed Headline Inflation Target Variability Interval Q2Q4Q2Q4Q2Q4Q2Q4Q2Q4Q2Q4Q2Q4Q2Q4Q2Q4Q2Q4Q2Q4Q2Q4Q2Q4 2006 2007 2017 2018 2/ Quarterly average of annual core inflation. Source: Banco de México and INEGI. Q4 2017 Q4 2018 Q4 35 7.0 6.5 6.0 5.5 5.0 4.5 4.0 3.5 3.0 2.5 2.0 1.5 1.0 0.5 0.0
Risks to the Inflation Outlook Downward Upward Further reduction in prices of widely used inputs, such as telecommunication services, as a consequence of structural reforms. That the depreciation of the national currency would persist or become accentuated, which would contaminate inflation expectations and generate second round effects, which would negatively affect the price-setting process. That the deceleration of the national economic activity would accentuate. Price increments in agricultural products and gasoline, although their impact on inflation would be transitory. Quarterly Report July - September 36
Monetary Policy Stance Recent international events could impact the structural links between Mexico and its main trade partner. In this context, it is both natural and necessary to observe a depreciation of the real exchange rate, being the most efficient adjustment mechanism and shock absorber. The main contribution of Banco de México during this adjustment process, given its mandate, is to ensure that changes in relative prices take place in an orderly fashion, in order to prevent inflation expectations from being contaminated, and to avoid second round effects, which would negatively impact the price-setting process of the economy. Quarterly Report July - September 37
Monetary Policy Stance The Board of Governors will closely monitor the evolution of all inflation determinants and its medium- and long-term expectations, especially: The possible pass-through of exchange rate adjustments onto prices, without implying any preset or desired level for the exchange rate. The monetary position of Mexico relative to that of the U.S., without overlooking the evolution of the output gap. This will be done in order to be able to continue taking the necessary measures to consolidate the efficient convergence of inflation to its 3 percent target, with full flexibility and to the extent that the prevailing conditions may demand. Quarterly Report July - September 38
Strengthening Confidence in the Mexican Economy It is indispensable to continue implementing structural reforms adequately and promptly, as they would boost the country s productivity and would allow a better resource allocation. In addition, structural reforms will allow fostering greater sustained growth in the domestic market, which will contribute to offset the effects of the deeply adverse external environment faced by the Mexican economy. Current risks to the trade relation between Mexico and the U.S. highlight the importance of diversifying Mexican exports destinations. Quarterly Report July - September 39