Banxico Monetary Policy Statement - 2019-02-07
Central bank: banxico | Type: decision | Date: 2019-02-07

February 7, 2019
This document is provided for the reader’s convenience only. The translation from the official Spanish version was made by
Banco de México’s staff. Discrepancies may possibly arise between the original document in Spanish and its English translation.
For this reason, the original Monetary Policy Statement in Spanish is the only official document.
Banco de México’s Gov erning Board has decided to maintain the target for the ov ernight
interbank interest rate at 8.25%.
Available indicators suggest that during the fourth quarter of 2018 the world economy decelerated, as
evidenced by the lower dynamism in most advanced and some emerging economies, such as the
Eurozone, China, and, to a lesser extent, the United States. This reflects, among other factors, the effects
of trade disputes , declining business confidence , and transitory shocks . This environment of lower
dynamism of economic activity led to downward revisions in the outlook for world growth f or 2019 and
2020, and, together with the decrease in crude oil prices, contributed to ease inflationary pressures in
the main economies. The latter has been reflected in expectations of a slower normalization of monetary
policy in the major economies, and in lower short- and long-term interest rates in the United States. As
expected, in January the Federal Reserve left the target range for the federal funds rate unchanged.
Also, it modified significantly its message, stating that it will be patient in makin g future adjustments to
the target range for the federal funds rate and that it could adjust the details of its balance sheet
normalization program if necessary. In this context, financial markets in both advanced and emerging
economies have exhibited a mo re favorable performance. As for the risks to the global economy, the
uncertainty regarding trade disputes between the U.S. and China, a disorderly Brexit process, a lower -
than-expected growth of the Chinese economy, and an escalation of political and geopolitical turmoil in
different regions stand out.
Since the last monetary policy decision, the prices of financial assets in Mexico have exhibited a more
favorable performance. The Mexican peso appreciated and exhibited lower volatility. Additionally,
sovereign risk premia and interest rates for the medium and long terms decreased, partly reverting the
increases exhibited in the last months of 2018, although they still remain at high levels. Among the factors
contributing to a better performance of domestic markets were the reduction in interest rates in the United
States and the weakening of the US dollar, the Economic Package approved for 2019, and investors’
consent to the New Mexico City International Airport bond buyback offer. Nevertheless, in view of
Pemex’s challenges, Fitch downgraded its credit rating, which will imply greater financing costs for
Mexico’s state-owned oil company.
The current environment continues to pose significant risks in the medium and long terms that could
affect the country’s macroeconomic conditions, its potential growth, a nd the economy’s price formation
process. In this regard, it is particularly important that, in addition to following a prudent and firm monetary
policy, measures to foster an environment of confid ence and certainty for investment and higher
productivity are adopted, and public finances are consolidated sustainably. In this context, it is especially
relevant that the fiscal goals set in the Economic Package for 2019 are attained. Strengthening the rule
of law and tackling corruption are equally imperative.
During the fourth quarter of 2018, Mexico’s economic activity decelerated significantly as compared to
the third quarter and this pattern could continue at the beginning of 2019 as a result of the slowdown of
the world economy, some weakness in domestic demand, and to factors of a transitory nature that might
affect growth in the first quarter of the year, including those associated with fuel distribution and with the
blocking of transportat ion routes. Thus, s lack conditions in the economy loosened towards the end of
2018 and the early part of this year . Due to the latter, the balance of risks for growth is biased to the
downside.
Inflation fell from 4.72% in November 2018 to 4.37% in January 2019, mainly due to a reduction in non-
core inflation, as core inflation continued to exhibit a resistance to decline, going from 3.63% in November
to 3.60% in January. During such period, non-core inflation fell from 8.07% to 6.81%, mirroring the lower
increases in energy and in livestock product prices . These results were partially offse t by greater
increases in fruit and vegetable prices. Headline inflation expectations for 2019 and 2020 showed a
marked deterioration in December and some improvement in January. Those corresponding to the end
of 2019 went from 3.71% in October to 3.89% in December, and then decreased to 3.80% in January.
As for core inflation expectations for the end of 2019, these adjusted from 3.45% in October to 3.50% in
December and January. Headline inflation expectations for the medium and long terms continue to be
above the 3% target, at around 3.50%. As for information drawn from market instruments, medium- and
long-term inflationary risk premia decreased, but still remain at high levels.
Regarding the risks for inflation, the possibility that the peso exchange rate comes under pressure
stemming from external or domestic factors stands out. Should the economy require adjustments either
to the real exchange rate or to medium- and long-term interest rates, Banco de México will contribute to
making such adjustments occur in an orderly manner, in an effort to prevent second-round effects on the
economy’s price formation process. Inflation could also be affected if new pressures on energy prices or
on agricultural product prices arise, if an escalation of protectionist and compensatory measures
worldwide materializes, or in case public finances dete riorate. Considering the magnitude of the recent
minimum wage increases, in addition to their possible direct impact, there is also the risk that these bring
about wage revisions that exceed productivity gains and give rise to cost pressures, affecting for mal
employment and prices. In order to raise the purchasing power of wages sustainably, the role of other
public policies must be considered, in particular, fostering competition in those sectors of goods and
services with a high share in the consumption b asket of the segments of the population with the lowest
income. Also, the persistence shown by core inflation could give rise to a greater resistance of long-term
inflation expectations to decline . As for downside risks, those that stand out are possible lower price
increases in some of the goods included in the non-core subindex or a greater-than-foreseen widening
in slackness conditions. Considering all of the above, the balance of risks for the forecasted path of
inflation remains biased to the upside, in an environment of high uncertainty.
To guide its monetary policy actions, Banco de México’s Governing Board follows closely the
development of inflation vis-à-vis its forecasted trajectory, taking into account the monetary policy stance
adopted and the time frame in which monetary policy operates, as well as available information on all
inflation determinants and on medium- and long-term inflation expectations, including the balance of risks
for such factors. Monetary policy must respond prudently if for any reason the uncertainty faced by the
economy increases considerably. In this context, considering that the recent developments in inflation
and its main determinants have not changed significantly with respect to their foreseen path, that the
cyclical position of the economy has loosened somewhat, and that the current monetary policy stance is
consistent with the convergence of inflation to its target, Banco de México’s Governing Board has decided
unanimously to leave the target for the overnight interbank interest rate unchanged at 8.25%. Considering
the risks to consolidate low and stable inflation as well as those the economy’s price formation is subject
to, the Governing Board will take the necessary actions so that the reference rate is kept at a level
consistent with the convergence of headline inflation to Banco de México’s target within the time frame
in which monetary policy operates.
Banco de México’s Governing Board will maintain a prudent monetary policy stance and , under the
current environment of uncertainty, will follow closely the potential pass -through of exchange rate
fluctuations to prices, the monetary policy stance relative to that of the U.S. , under an external
environment that it is still subjec t to risks, and to the behavior of the conditions of slack in the Mexican
economy. In the presence and possible persistence of factors that, by their nature, involve risks to both
inflation and inflation expectations, monetary policy will be adjusted in a timely and firm manner to achieve
the convergence of inflation to its 3% target and to strengthen the anchoring of medium - and long-term
inflation expectations so that they attain such target.