Banxico Monetary Policy Statement - 2019-08-15
Central bank: banxico | Type: decision | Date: 2019-08-15

August 15, 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 lower the target for the overnight interbank
interest rate by 25 basis points to 8.00%.
World economic activity decelerated during the second quarter of the year due to moderation of growth
in the main advanced and emerging economies. In this environment, the outlook for growth for the world
economy has been revised downwards once more. Likewise, disputes arose between the United States
and other economies related both to trade as well as to issues associated with migration, technology and
exchange rate policy. Headline and core inflation in the main advanced economies have remained at low
levels and below their central banks’ targets. In this context, a large number of central banks have
adopted more accommodative monetary policy stances. In its July meeting the US Federal Reserve cut
the target range for the federal funds rate by 25 basis points and anticipated the end of its balance sheet
reduction. Episodes of volatility in financial markets associated with the tensions between the United
States and China, and with a greater than expected deceleration in some economies, have taken place.
This environment has led to expectations of further monetary policy easing by several central banks. The
risks faced by the global economy have increased: escalation of trade disputes, a disorderly Brexit, and
the worsening of certain political and geopolitical risks stand out. For this reason, the balance of risks for
world economic activity has deteriorated.
Domestic financial markets have been influenced by the effects of lower interest rates for all terms in the
major advanced economies and by episodes of volatility. Thus, while the peso exchange rate fluctuated
under these episodes, interest rates on g overnment securities have decreased, including longer term
ones. Regarding the r isks that may affect the performance of financial assets in Mexico , uncertainty
persists with respect to the bilateral relationship between Mexico and the United States and to the credit
rating outlook both for Pemex’s debt and for Mexico’s sovereign debt.
The current environment continues to pose significant medium- and long-term risks that could affect the
country’s macroeconomic conditions, its ability to grow, 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 that 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 for 2019
are necessary . It is also important that the Economic Package for 2020 generates confidence.
Strengthening the rule of law, tackling corruption, and fighting insecurity are equally imperative.
The latest information suggests that during the second quarter of 2019, the stagnation of economic
activity in Mexico observed in the previous quarters continued, due to a further weakening of most of the
components of aggregate demand. Thus, s lack conditions in the economy have continued to loosen,
even more than expected, widening the negative output gap. In an environment of significant uncertainty,
the balance of risks for growth remains biased to the downside.
Between June and July, headline inflation fell from 3.95% to 3.78%, due mainly to a decline of the non-
core component, which went from 4.19% to 3.64%, reflecting the lower increases especially in the prices
of energy products and in fruits and vegetables prices as well, while the rate of growth of livestock product
prices has increased at the margin. As for core inflation, it has remained persistent around 3.8%. Inflation
expectations for different terms from surveys and financial markets have remained relatively stable,
although at levels above 3%.
As for upside inflation risks, core inflation may continue to show persistence and there is the possibility
that the peso exchange rate comes under pressure stemming from external or domestic factors. Should
the economy require an adjustment of the real exchange rate , Banco de México will contribute to an
orderly process, preventing second-round effects on the economy’s price formation process. Additional
risks are t he threat by the U nited States to impose tariffs on Mexican imports and the adoption of
compensatory measures, although these have dissipated somewhat; that energy prices revert their trend
or that agricultural and livestock product prices exhibit increases; weak public finances; and, that global
protectionist measures escalate. In addition, given the magnitude of several wage revisions, that cost -
related pressures arise, insofar as such revisions exceed productivity gains. Regarding downside risks,
the peso exchange rate may appreciate, possibly associated with a context of more accommodative
monetary policy stances and lower interest rates worldwide, or in case greater certainty arises regarding
the trade relation with the United States. 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 , which would also contribute to reduce core
inflation. In addition, that slack conditions widen more than anticipated, which would impact the behavior
of core inflation. Given the aforementioned, high uncertainty still persists regarding the risks that might
affect inflation. In this context, Banco de México will be alert to the possible materialization of inflation
risks, both to the downside and 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 . 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 f aced by the economy increases significantly. In this context, considering that headline
inflation has decreased as foreseen by Banco de México , the greater than expected widening in the
amount of slack in the economy, and the recent behavior of the external and domestic yield curves at
various terms , Banco de México’s Governing Board decided by majority to lower the target for the
overnight interbank interest rate by 25 basis points to 8.00% , considering that under the current
environment such level is consistent with the convergence of headline inflation to the central bank’s target
within the time frame in which monetary policy operates. One member voted to maintain the target at
8.25%. In order to consolidate a low and stable inflation, in an environment in which price formation and
slack conditions in the economy are subject to risks, 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
required 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 rela tive 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 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.