Banxico Monetary Policy Statement - 2019-05-16
Central bank: banxico | Type: decision | Date: 2019-05-16

May 16, 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 Governing Board has decided to maintain the target for the ov ernight
interbank interest rate at 8.25%.
Since the second half of 2018, world economic activity has exhibited a downward trend , although a
moderate recovery was observed during the first quarter of 2019 in some of the major economies, such
as the United States, the United Kingdom, the euro area and China , to a large extent associated with
short run factors . Labor markets in the major advanced economie s continued to exhibit strength and
certain wage increases. Although headline inflation in these economies has rebounded due to the
increase in energy prices, core inflation has decreased in several of them, in some cases due to transitory
factors and methodological changes. This environment has strengthened expectations that the central
banks of the major economies will adopt a more accommodative monetary policy strategy. In its May
meeting, the US Federal Reserve left the target range for the federal funds rate unchanged and reiterated
its message that it will be patient in making adjustments to the range. Among the risks that still persist
and are worth highlighting are an escalation of trade tensions between the U.S. and its main trade
partners; a more prolonged weakening of some of the major economies than expected; new episodes of
volatility in financial markets; and, the intensification of certain political and geopolitical risks. Due to the
aforementioned, the balance of risks for the global economy continues biased to the downside.
As for domestic financial markets, the peso exchange rate appreciated compared to the levels observed
during the last monetary policy decision, while exhibiting higher levels of volatility. Interest rates on
government securities increased, mainly those for the medium and long terms. Looking ahead, risks
persist which might have a significant effect on the performance of financial assets in Mexico. In
particular, uncertainty regar ding the external environment might lead to portfolio adjustments , and
investors remain alert to domestic issues such as the credit perspectives for Pemex and for the economy
in general.
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, and the economy’s price formation
process. In this regard, it is particularly important that, in addition to a prudent and firm monetary policy,
measures to foster an environment of confidence and certainty for investment and higher productivity are
adopted, and public finances are consolidated in a sustainable way . In this context, it is especially
relevant that the fiscal targets set in the Economic Package for 2019 are attained. Strengthening the rule
of law, tackling corruption, and fighting insecurity are equally imperative.
The latest information suggests that during the first quarter of 2019 the weak performance the Mexican
economy had been exhibiting since the previous quarter intensified, due to both external and domestic
factors, some of which are transitory. Thus, economic slack increased towards the end of 2018 and the
early part of 2019. The balance of risks for growth has become more uncertain and remains biased to
the downside.
Between March and April, headline inflation rose from 4.00% to 4.41%, due to increases in its core and
non-core components, with core inflation’s contributing in greater measure. As for non -core inflation, it
increased from 5. 47% to 6.08%, partly reflecting that since the second week of February 2019, the
downward path in energy price increases reverted, due largely to the evolution of their international
references. As for core inflat ion, it rose during this period, from 3.55% in March to 3.87% in April. This
was due to continued increases in the rate of change of food merchandise prices, while that for services
prices rebounded during the same period . Services prices were partly influenced by the effect on their
annual variations of the Easter holiday, which this year took place in April, while in 2018 it did so in March.
Nevertheless, even after excluding this effect , the annual variation of services prices increased. Thus,
core inflation has remained at high levels, and recently has increased further. Headline and core inflation
expectations increased for both the short and medium terms, while those for the long term remained
unchanged, all of them remaining clearly above the 3% permanent target. As for information drawn from
market instruments, after having followed a downward trend, the medium- and long-term inflationary risk
premium has increased over the last weeks, remaining at high levels.
As for inflation risks, 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 rat es, Banco de México will contribute to orderly
adjustments, in an effort to prevent second -round effects on the economy’s price formation process.
Inflation could also be affected if additional pressures on energy prices or o n agricultural and livestock
product prices arise, if an escalation of protectionist and compensatory measures worldwide materializes
or in case public finances deteriorate. Moreover, given the magnitude of the increases to the minimum
wage, in addit ion to their possible direct impact, there is the risk that these bring about high wage
revisions in several sectors. In fact, in some sectors these have exceeded productivity gains and could
give rise to cost pressures, thus affecting formal employment and contributing to keep core inflation at
high levels. 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 basket of the segments of the population wi th the lowest income. Also,
the persistence shown by core inflation could imply a greater downward resistance of medium- and long-
term inflation expectations. Finally, another risk is that the greater economic slack does not translate into
lesser pressures on inflation, given the factors that have been putting upward pressure on core inflation.
As for downside risks, the prices of certain goods included in the non-core subindex could register lower
variations or economic slack could widen more than expected. Thus, although there has been an
intensification of certain downside risk factors, like the greater slack in the economy, there are others that
could make inflation remain at high levels and, therefore, deviate it from its foreseen path, given the
factors that have restrained core inflation from decreasing. For this reason, in an environ ment of high
uncertainty, it is deemed that the balance of risks for inflation relative to its forecasted trajectory still
remains to the upside.
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
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. Although headline and core inflation have increased, these developments are
considered to be transitory and the current monetary policy stance consistent with the convergence of
inflation to its target within the time frame in which monetary policy operates. For this reason, Banco de
México’s Governing Board has decided unanimously to leave t he target for the overnight interbank
interest rate unchanged at 8.25%. Considering the risks to consolidate a low and stable inflation as well
as those the economy’s price formation is subject to, the Governing Board will continue to follow closely
all factors and elements of uncertainty that have an impact on both inflation and its outlook, and 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 period 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, Mexico’s monetary policy stance relative to that of the U.S. -in an external
environment that it is still subject to risks- and the behavior of slack conditions and cost-related pressures
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.