manuel sanchez : the effects of monetary divergence remarks by mr manuel sanchez, deputy governor of the bank of mexico, at the symposium jornadas economicas, organized by the banco de guatemala, guatemala city, 7 june 2016. * * * accompanying graphs can be found at the end of the speech. i would like to thank the bank of guatemala for the invitation to participate in this symposium, now in its 25th year, which has become an invaluable forum for discussing substantive economic issues in latin america. on this occasion, i will devote my comments to the divergence of monetary policy stances in advanced nations and the potential impact this may have on emerging economies. as usual, my remarks are entirely my own and do not necessarily reflect the views of the bank of mexico or its governing board. monetary policy divergence central banks guide their actions according to the developments and outlook of their own economies. most of them hold as a primary objective a low inflation rate, commonly two or three percent in annual terms, but they also take into account economic growth, either as an explicit objective or as an essential piece of information for pursuing price stability. at any moment, economies could find themselves in different cyclical stages and confronted with particular challenges. thus, it should not be surprising that monetary policies among nations do not coincide. not only can monetary stances vary internationally, being tighter or looser than their neutral references could be, but also, these differences can widen over time. one example of discrepancy occurred in the 1990s between the united states, which began to tighten policy in a context of economic growth, and germany, which started to do the opposite in the face of higher unemployment stemming from political unification. notwithstanding such particular cases, there does seem to exist a certain tendency in the medium term toward the international synchronization of economic cycles, especially among high - income countries. additionally, in recent decades inflation rates have been persistently declining in advanced as well as non - advanced economies. consequently, a propensity towards convergence among monetary policies has become evident, particularly among developed nations. see graph 1 in a world in which economic and financial integration has become tighter, it is difficult to conceive of domestic monetary policies as completely isolated, including those of large economies. by way of illustration, the u. s federal reserve has repeatedly stated that it will continue to consider global economic and financial developments in its decision - making process. the aforementioned output and monetary synchronizations are

aid us in thriving even more. in doing so, i have structured my message in four ( 4 ) parts : ( 1 ) recent developments in the global economic environment and its varied effects on financial and banking stability with mention of the bsp ’ s policy thrusts and initiatives ; ( 2 ) bsp ’ s delivery on its mandate of maintaining price stability ; and ( 3 ) the challenge of digitization and how our payments and settlements system plays a role ; and ( 4 ) finally, i shall share the bsp ’ s mindset for embracing the future. it bears noting that in framing the message this way, i have touched on our mandates, and what the bsp regards as its pillars of central banking. the global economy and domestic financial stability 2017 saw increased momentum in global economic growth. many central banks reverted to more neutral positions, while some signalled the possibility of a tighter monetary policy stance over the horizon. positive us growth momentum prompted the us federal reserve, just last month, to raise its target fed funds rate anew. the european central bank continues to ponder on how and when to start tapering its own asset purchase program. 1 / 4 bis central bankers'speeches with the prospect of higher home market interest rates, some funds have moved back from emerging markets. last year, we saw some capital flow reversals. but despite an overall balance of payments deficit, our year ended with a very manageable external position. in 2017, we also saw the peso ’ s depreciation. even as foreign direct investments flowed in, a reversal of foreign portfolio investment flows as well as loan prepayments was felt in the financial account. the bsp ’ s first line of defense has been to maintain a flexible exchange rate while providing foreign currency liquidity from its amply supply of fx reserves to manage sharp movements. but we also saw a recovery in our exports as major markets picked up. this bodes well for our current account in the coming year. this partially offsets the potential increase in imports of raw materials and manufactured goods due to accelerating public investment in infrastructure. moreover, the steady inflow of remittances from overseas filipinos, receipts from bpos and tourism are seen to provide solid buffers to maintain a manageable balance of payments. despite uncertainties and volatility in the global economy and financial markets brought about by brexit and inward - looking and populist policies of the us, domestic sources of strength have kept the philippine economy growing strongly