Banxico Monetary Policy Statement - 2018-08-02
Central bank: banxico | Type: decision | Date: 2018-08-02

August 2, 2018
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 decided to maintain the target for the ov ernight interbank
interest rate unchanged at 7.75%.
Available data up to the second quarter of 2018 suggests that the world economy continued to grow at a
relatively fast pace. However, there is an increasing divergence in the main advanced economies ’
performance. In particular, in contrast with the Eurozone, Japan and the U.K., which have grown below
expectations, economic activity in the U.S. grew at a faster rate, partly in response to the fiscal stimulus
implemented. Under conditions of reduced slack in the economy, this situation could exert greater
pressures on inflation. As expected, in August the Federal Reserve kept the target range for the federal
funds rate unchanged and reiterated its forecast of increasing it gradually. The world economy is subject
to uncertainty in the short term and, to a larger extent, in the medium term. This is due to the risks
associated with the intensification of trade- related disputes, to a possible tightening of financial
conditions, and to geopolitical factors.
International financial markets have undergone episodes of volatility in recent weeks. In particular, asset
prices of emerging economies declined, particularly those of Asian countries . In contrast, since the last
monetary policy decision, the Mexican peso appreciated and exhibited lower levels of volatility . This
behavior reflected, in part, lesser uncertainty after the country’s elections and an improvement in the
outlook for the NAFTA renegotiation. Inter est rates in Mexico decreased moderately for both short and
long tenors.
The latest information suggests that during the second quarter of 2018, economic activi ty in Mexico
contracted with respect to the previous quarter. This result is partly the reflection of both the reversion in
the dynamism that investment in construction had presented and the weakening of exports, although
private consumption is expected to have exhibited positive results. As a result, slack conditions are
estimated to have loosened, while in 2018 GDP growth is anticipated to fall to the lower half of the
estimated range (2 to 3%) and, therefore, that slack conditions will continue to loosen. Given the
uncertainty generated by the complex environment faced by the Mexican economy, Banco de México’s
Governing Board considers that the balance of risks for growth maintains a bias to the downside.
The Mexican economy is now in a better position to cope with adverse scenarios due to the central bank’s
monetary policy stance adopted to keep medium - and long-term inflation expectations anchored, the
fiscal commitments, and the financial system’s resilience. Nevertheless, the economy is expected to
continue facing a complex environment, both in the external and domestic fronts. For this reason, i t is
particularly relevant that, in addition to following a prudent and robust monetary policy, measures to foster
greater productivity are adopted and public finances are consolidated sustainably.
During the first months of 2018, annual headline inflation decreased, in line with the trajectory forecasted
by Banco de México in its latest Quarterly Report. Neverthe less, since June, some of the risks to the
upside that had been previously referred to materialized, due to higher-than-expected rises in the prices
of energy-related products, mainly those of gasoline and L.P. gas, which led to significant increases in
non-core inflation. The referred change in relative prices affects the expected trajectory for headline
inflation for the next twelve months, although its effects are estimated to be transitory. Core inflation, on
the other hand, continues to follow a downward trend and is foreseen to continue to decrease within the
time frame in which monetary policy operates. Under this context, expectations for headline inflation for
the end of 2018 were adjusted from 4.00% in June to 4.25% in July, whereas those for the end of 2019
remained around 3.60%, and those for the medium and long terms around 3.50%.
The above scenario continues to be subject to risks and to a high degree of uncertainty. Among the
upside risks to inflation are pressures on the peso exchange rate due to an environment of higher external
interest rates and U.S. dollar strength, and to persisting uncertainty in both the external and domestic
fronts, among which the NAFTA renegotiation stands out. In the event of a scenario in which the real
exchange rate would need to adjust, Banco de México will make sure it takes place in an orderly manner,
and with no second-round effects on the economy’s price formation process. On the other hand, the risk
of additional upward pressures on some energy prices or of increases in agricultur al prices persists.
There is also the risk that the trade policy measures adopted by the U.S. give rise to an escalation of
protectionist and countervailing actions that could adversely affect the behavior of inflation. As for
downside risks, the peso could appreciate if NAFTA negotiations turn out to be favorable. Summing up,
since the last monetary policy decision, the balance of risks to the forecasted trajectory of inflation
remains biased upwards, 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 anticipated 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. Given the Mexican economy’s recent developments and, in particular, that the shocks
that have a ffected inflation recently are of a transitory nature, and considering that core inflation is
expected to continue on a downward trend, Banco de México’s Governing Board has voted unanimously
to maintain the target for the overnight interbank interest rate unchanged at 7.75%.
Looking ahead, the Governing Board will maintain a prudent monetary policy stance and will continue to
follow closely the potential pass -through of exchange rate fluctuations to prices, the monetary policy
stance relative to that of the U.S., and 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 robust manner to achieve the convergence
of inflation to its 3% target and to firmly anchor medium- and long-term inflation expectations so that they
attain such target.