and since 2003 the permanent target has been 3 percent annual inflation. this commitment refers to headline inflation as measured by the national consumer price index ( inpc ). a variability range of plus / minus one percentage point around this benchmark was added later, an addition which should not be interpreted as a target but as an acknowledgment of uncertainty stemming from the highly volatile nature of some components of the price index. in 2008 the bank of mexico formally replaced its policy instrument, moving from a quantitative guideline ( the “ corto ” ) to the overnight interest rate used in the interbank market. in the middle of that year, to counter pressures from currency depreciation and other supply bis central bankers ’ speeches shocks which had pushed inflation off the convergence path to its permanent target, the bank of mexico raised its reference interest rate by 75 basis points. 3 however, in 2009 when it was clear that those pressures had ceased to threaten price stability, the bank of mexico relaxed its monetary policy. specifically, from january to july of that year the overnight policy interest rate was cut 375 basis points in all, and since then the reference policy rate has been kept at 4. 5 percent. the resulting expansionary monetary stance, as reflected in the central bank ’ s monetary conditions index, among other indicators, has helped to mitigate the impact of the global trade and output contraction that led to the severe recession in 2009. 4 monetary policy was effective at bringing inflation back to the desired convergence path. annual inflation fell from 6. 5 percent in 2008 to 3. 6 percent in 2009 and since then its average has been 3. 9 percent. furthermore, after hitting 3 percent in march of 2011, annual inflation has remained substantially close to, albeit somewhat above, the permanent target. the fact that inflation has approximated the objective during the last four months is a hopeful sign, since a similar pattern had not been achieved since 2006. this progress should be beneficial to expectations for the sustained feasibility of the inflation target in a context of economic growth. in order to take full advantage of the current benign environment, monetary policy must continue to be geared toward facilitating the anchoring of inflation expectations on the permanent target. a challenge to this goal is the fact that medium - and long - term inflation expectations, as reflected in analyst surveys and the bond markets, still remain above 3 percent, and in the recent past, short - term expectations frequently surpassed this level by a large margin. monetary policy should also take into

basis of monetary policy decisions in mexico. the second development centers on the transfer of the responsibility for producing the price indices to the national geography and statistics institute ( inegi ) beginning this month. the independence of inegi from the bank of mexico should further support monetary policy credibility. finally, i would like to acknowledge the critical role that responsible fiscal policy in mexico has played in the reduction of inflation. narrow fiscal deficits and the adequate management of public indebtedness, as expressed in moderate debt - to - gdp ratios, the long duration of public debt, and low foreign - currency exposure, among other indicators, have been notably supportive. definitively, the deepening of a solid fiscal position will continue to be a prerequisite for sustainable price stability in mexico. concluding remarks since the middle of 2009, the mexican economy has shown clear improvement. recent indications of moderation notwithstanding, mexico ’ s economic outlook continues to be one of recovery in which the main risks are external. relative stability in financial markets has led to substantial capital inflows to the country, without generating any noticeable problems. future reversals of these flows cannot be ruled out, given free capital mobility, but if they materialize, such events should not harm the functioning of the economy provided that its strong fundamentals are maintained. finally, monetary policy faces the challenge of perseverance in order to ensure continued progress on the long road to price stability. bis central bankers ’ speeches