Banxico Monetary Policy Statement - 2018-10-04
Central bank: banxico | Type: decision | Date: 2018-10-04

October 4, 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 at 7.75%.
During the second quarter of 2018, the world economy continued to grow at a moderate pace , and the
divergence among the main advanced economies’ performance increased. Indeed, in contrast with the
Eurozone, Japan and the U.K., which have grown below expectations , economic activity in the U.S.
exhibited higher growth, partly in response to the fiscal stimulus implemented. Under conditions of
reduced slack in the economy, this could exert greater pressure on inflation. As expected, in September
the Federal Reserve raised the target range for the federal funds rate and reiterated its forecast of
increasing it gradually , thus leading to an increase in interest rates for all terms. The world economy
continues to be subject to a high degree of uncertainty due to risks associated mainly with a further
intensification of international trade disputes, a further tightening of financial conditions, and with
geopolitical factors. In this environment, international financial markets have recently undergone
episodes of volatility and the prices of emer ging economies’ assets have performed negatively.
Nevertheless, differences related to each country’s macroeconomic fundamentals and to idiosyncratic
factors have been observed. Thus, since the last monetary policy decision, the Mexican peso has been
more resilient than other emerging market currencies . In addition to Mexico’s prudent macroeconomic
management, this result was also associated with the favorable developments related to the trade
negotiation with the United States and Canada. Concerning interest rates in Mexico, those of short tenors
fluctuated slightly while those of medium and long tenors increased.
The latest information suggests that at the beginning of the third quarter of 2018 economic activity in
Mexico expanded, after having contracted during the second quarter. Slack conditions in the economy
are estimated to have remained similar to those observed during the previous quarter. Given the complex
environment the Mexican economy faces, Banco de México’s G overning Board considers that the
balance of risks for growth continues biased to the downside. This bias has decreased at the margin as
a result of the recently approved trade agreement with the United States and Canada.
The Mexican economy is well poised to cope with adverse external and domestic 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. In this regard, despite the
decreased uncertainty associated with Mexico’s trade relationship with the U.S. and Canada, the
Mexican economy continues facing a complex environment characterized, among other factors, by the
risk of tighter external financial conditions. Under these circumstances, it 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.
Since June, higher-than-expected rises in the prices of energy -related products have been observed,
mainly of gasoline and L.P. gas. Although these shocks are transitory, they have affected the rate at
which core inflation has been declining, due to the indirect effects of these price increases on production
costs, and they have also delayed the convergence of headline inflation to its target. In this regard,
although these price increases stem from higher international references, the gradual adjustment of
domestic gasoline prices has made such increases more persistent. This has contributed to keep non-
core inflation high for a long period. Although core inflation has been subject to the aforementioned
indirect effects, projections that it will continue decreasing wit hin monetary policy’s period of influence
are maintained. In this context, expectations for headline inflation for the end of 2018 have been adjusted
from 4.25% in July to 4.50% in September, while those for the end of 2019 have increased from 3.60%
to 3.70%, respectively. Expectations for core inflation for the end of 2018 decreased from 3.60 to 3.53%
during the same months and those for the end of 2019 remained practically unchanged. Expectations for
headline inflation for the medium and long terms remain around 3.50%.
The expected evolution of inflation continues to be subject to risks and to a high degree of uncertainty .
Among the upside risks are pressures on the peso exchange rate due to an environment of higher
external interest rates and to other external or domestic factors. In this regard, should there be a real
exchange rate depreciation, Banco de México will make sure this takes place in an orderly manner and
with no second-round effects on the economy’s price formation process. On the other hand, the following
risks persist: additional upward pressures on energy prices, as indicated by the futures prices of some of
these products; escalating protectionist measures worldwide that could affect inflation negatively; and,
greater-than-anticipated levels of public expenditure. In addition, if wage negotiations are not consistent
with productivity gains, inflationary pressures on the economy could also appear. As for downside risks,
the ratification of the new trade agreement with the U.S. and Canada could have a favorable impact on
markets and on the Mexican peso exchange rate . Considering all of the above, the balance of risks to
the forecasted trajectory of inflation remains biased upwards, in an environment of 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, that the shocks that have affected
inflation recently are of a transitory nature, and that the expected trend for core inflation remains
downward, Banco de México’s Governing Board has voted by majority to maintain the target for the
overnight interbank interest rate unchanged at 7.75%. One member voted for increasing the rate by 25
basis points . The Governing Board will monitor the potential pass -through of the shocks that have
affected non-core inflation as well as other factors that could affect the evolution of core inflation, which
is particularly relevant in the present scenario, since this indicator is still above 3%. In this regard, the
central bank wi ll take the necessary actions, specifically, maintaining or possibly strengthening the
current monetary policy stance so that headline inflation converges to Banco de México’s target within
monetary policy’s period of influence.
Banco de México’s 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. under an adverse external environment, 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 achiev e 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.