Banxico Monetary Policy Statement - 2019-03-28
Central bank: banxico | Type: decision | Date: 2019-03-28

March 28, 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 overnight
interbank interest rate at 8.25%.
Available indicators suggest that the weakening of world economic activity observed during the second
half of 2018 continued during the early part of 2019, as evidenced by the lower dynamism in most
advanced and some emerging economies, such as the euro area, China , and, to a lesser extent , the
United States. This has led to a decline in global growth expectations. Labor markets in the major
advanced economies continued exhibiting tightness. Nevertheless, headline inflation in these economies
has decreased, partly due to the lower energy prices in relation to the previous year, while core inflation
has remained relatively stable. All of the above has consolidated expectations that the major central
banks would not tighten monetary conditions in the foreseeable future. In March, the Federal Reserve
left the target range for the federal funds rate unchanged and reiterated its message that it will be patient
in making future adjustments to the target range . In addition, the median of the Federal Open Market
Committee (FOMC) economic projections suggests that there will be no increases in the federal funds
target range in 2019. The Fed also announced significant changes in the strategy for the normalization
of its balance sheet, which consists of shrinking the rate of reduction of its securities holdings starting in
May and concluding such process in September of this year. In this context, the interest rates of U.S.
Treasury bonds decreased significantly for all terms, thus increasing risk appetite in financial markets
and leading to higher capital flows to emerging economies. In this regard, it is important to highlight that
risks to the global economy persist, among which a sharper deceleration than previously foreseen, 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 more favorable conditions that have prevailed in international
financial markets have contributed to the positive performance of financial assets in Mexico.
Nevertheless, some risk factors and the uncertainty associated with the Mexican economy have led to
an additional discount or risk premium for domestic assets . Among such factors, those related to the
credit rating of Pemex, and even to Mexico’s sovereign debt, are particularly noteworthy.
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 following 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 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.
Available information suggests that, in the early part of 2019, Mexico’s economy continued registering
low growth as a result of the slowdown of the world economy, some weakness in domestic demand, and
transitory factors that might have affected growth during the first quarter of the year . Thus, slack
conditions in the economy loosened towards the end of 2018 and the early part of 2019. Due to the latter,
the balance of risks for growth remains biased to the downside.
Between January and the first two weeks of March, headline inflation fell from 4.37% to 3.95%, mainly
due to the decline in non-core inflation, which went from 6.81% in January to 5.39% in the first two weeks
of March, as a result of the lower increases in energy and in agricultural and livestock product prices.
Nevertheless, some of the favorable shocks that have led to the fall in non-core inflation have started to
revert recently. In particular, the prices of energy goods rose in the second half of February , reflecting
increases in their international references. With regards to core inflation, it evolved as anticipated, by
registering 3.60% in January and 3.51% in the first two weeks of March. Nevertheless, food merchandise
inflation has increased, while that of certain services remains high. As for inflation expectations, between
January and February the median of headline inflation expectations for 2019 and 2020 fell from 3.80%
to 3.65%, and from 3.71% to 3.60%, respectively. However, that of core inflation expectations for the end
of 2019 remained at 3.50%, while that for the end of 2020 increased slightly from 3.45% to 3.48%, during
the stated period. As for headline inflation expectations for the medium and long terms , these continue
to be above the 3% permanent target, at around 3.50%. Regarding medium -term core inflation
expectations, these increased from 3.42% to 3.50%, while those for the long term remained at 3.40% ,
after having been at 3.30% during most of 2018. As for information drawn from market instruments, the
medium- and long-term inflationary risk premium decreased, although it still remains 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 rates, Banco de México will contribute to m aking
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 additional 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 deteriorate. Considering the magnitude of the minimum
wage increases, in addition to their possible direct impact, there is also the risk that t hese bring about
wage revisions that exceed productivity gains and give rise to cost pressures, affecting formal
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 basket of the segments of the population with the lowest
income. Also, the persistence shown by core inflation could give rise to a greater resistance to decline of
long-term inflation expectations. 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. Altogether, although there has been an intensification of some of the downside
risk factors, there are still others that might put upward pressure on inflation in greater magnitude and
make it deviate from its foreseen path. For this reason, the balance of risks for the forecasted trajectory
for inflation still remains 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
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, 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 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.