Banxico Monetary Policy Statement - 2019-06-27
Central bank: banxico | Type: decision | Date: 2019-06-27

June 27, 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 overnight
interbank interest rate at 8.25%.
Available information suggests that the world economy decelerated during the second quarter of the
year. This situation was due to moderation of growth in some of the main advanced and emerging
economies. Although job creation has slightly decreased, unemployment rates in the main advanced
economies remain at low levels and wages continue recovering gradually. In turn, headline and core
inflation in these economies have remained at low levels and their expectations have decreased . The
aforementioned environment has increased the possibility that central banks of the major economies will
adopt more accommodative monetary policy stances. In its June meeting, the US Federal Reserve left
unchanged the target range for the federal funds rate. In its policy statement, it mentioned that the
uncertainty faced by the US economy has increased , under conditions where there is absence of
inflationary pressures and that, hence, it will follow closely the economic developments. It added that it
would take the appropriate measures in order to sustain the economic expansion with a strong labor
market and inflation at levels close to its symmetric 2% objective. This led to a decline in interest rates
throughout the entire yield curve and to an increase in risk appetite levels in international financial
markets. Nevertheless, risks to the global economy persist: a further escalation of trade tensions between
the United States and its main trade partners; the weakness of some of the major economies extending
longer than foreseen; new episodes of volatility arising in international financial markets; and , the
intensification of certain political and geopolitical risks. For this reason, the balance of risks for the global
economy remains biased to the downside.
Since the last monetary policy decision, domestic financial markets underwent episodes of volatility due
to the threat of tariffs on Mexican imports by the U.S. and to the revisions to the outlook or the credit
rating of sovereign debt and of Pemex’s debt by some rating agencies. Nevertheless, more recently,
given the agreement reached between the governments of Mexico and the United States, and the greater
risk appetite among investors in view of the outlook for more accommodative monetary policies, the peso
exchange rate reverted its previously observed depreciation and g overnment securities’ long - and
medium-term nominal and real interest rates decreased significantly. Nonetheless, ri sks that may
deteriorate the performance of financial assets in Mexico are still present. In particular, although domestic
financial markets have been adjusting to this environment, uncertainty regarding the bilateral relationship
between Mexico and the United States and the credit outlook both for Pemex’s debt and for Mexico’s
sovereign debt persists.
The current environment continues to pose significant medium- and long-term risks 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, addressing the deterioration
of both the sovereign’s and Pemex’s credit ratings and achieving the fiscal targets set in the Economic
Package for 2019 are necessary. Strengthening the rule of law, tackling corruption, and fighting insecurity
are equally imperative.
Available information suggests that in April economic activity increased marginally on a month-to-month
basis, below market expectations, standing out a slowdown of the services sectors, after the contraction
exhibited in the previous quarter , and that most components of aggregate demand, especially those
related to domestic demand, remain weak. Thus, slack conditions in the economy have loosened even
further than expected. The balance of risks for growth has become more uncertain and its downside bias
has increased.
Between April and the first fortnight of June, headline inflation fell from 4.41 % to 4.00%, due to the
significant decline of the non-core component, which went from 6.08% to 4.34%, reflecting the lower
increases observed in the prices of fruits and vegetables as well as in energy products, the latter partly
due to the fall in their international references. The lower increases of both of these components more
than offset the increases registered in livestock product prices. As for core inflation, it was 3.87% both in
April and in the first fortnight of June. Suc h result is due to the fact that although t he rate of change of
food merchandise prices continued to increase, that of services decreased during the period. Between
May and mid -June, short-, medium - and long -term headline and core inflation expectations did not
register significant adjustments, albeit in all cases they remained above the 3% target. Regarding
information drawn from market instruments, medium- and long-term breakeven inflation expectations
remain at high levels.
As for inflation risks, some have diminish ed and others have gained relevance. To the upside, 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 orderly adjustments, in an effort to prevent
second-round effects on the economy’s price formation process. The threat by the U nited States to
impose tariffs on Mexican imports and the adoption of compensatory measures also deserves mention,
although this risk has decreased as a result of the recent agreement. Other risks are that energy prices
revert their downward trend or that agricultural and livestock product prices exhibit increases; that public
finances deteriorate; that core inflation’s persistence influences medium- and long -term inflation
expectations by maki ng them show a greater resistance to decline ; and, that global protectionist
measures escalate . In addition, given the magnitude of several wage revisions , t hat cost-related
pressures arise, insofar as such revisions exceed productivity gains . To the downside, that the peso
exchange rate appreciates, possibly associated with a context of more accommodative monetary policy
stances and lower interest rates worldwide, or in case greater certainty regarding the trade relation with
the United States is achieved. Another downside risk is that the prices of certain goods included in the
non-core subindex register lower rates of change, as observed in the case of energy goods, due to the
greater weakness exhibited by the world economy . In addition, that slack conditions widen more than
anticipated, as suggested by the latest information on economic activity, which might influence the
behavior of cor e inflation. Given the aforementioned, high uncertainty persists regarding the risks that
might affect inflation.
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 . In this p rocess, it uses available information on
all inflation determinants as well as on medium - and long -term inflation expectations, including the
balance of risks for such factors . Monetary policy must also respond prudently if for any reason the
uncertainty faced by the economy increases considerably. In this context, considering that the current
monetary policy is consistent with the convergence of inflation to its target within the time frame in which
monetary policy operates, Banco de México’s Governing Board has decided by majority to maintain the
target for the overnight interbank interest rate at 8.25%. One member voted to reduce the target by 25
basis points. Considering the challenges to consolidate a low and stable inflation as well as those the
economy’s price formation is subject to and the amount of slack in the economy, the Governing Board
will continue to follow closely all factors and elements of uncertainty that have an impact on inflation and
its outlook and will take the requir ed actions based on incoming information so that the policy rate is
consistent with the orderly 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, Mexico’s monetary policy stance relative to t hat 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 economy. In the presence and possible persistence of factors that, by their nature, involve risks to
both inflation and its 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.