remarks by mr. javier guzman calafell, deputy governor at the banco de mexico, on “ monetary policy implementation in a complex environment ”, at the aberdeen nyc emd policy maker power lunch. new york city, october 11, 2016. 1 my sincere thanks to aberdeen asset management for the invitation to participate in this event. the primary mandate of the banco de mexico, enshrined in the country ’ s constitution, is to aim at low and stable inflation. to this end, monetary policy is conducted within a framework supported by two main pillars : an independent central bank and an inflation targeting regime with a 3 percent objective for the annual rate of growth of consumer prices. in this context, the banco de mexico seeks an efficient convergence of inflation to the target, that is to say, at the lowest possible cost in terms of economic activity. at present, monetary policy in mexico is implemented in a rather complex environment. on the one hand, the level of output is below the estimated potential, and the available forecasts suggest that this gap will remain in negative territory through end - 2017. in addition, consumer price inflation displays a favorable behavior and has been persistently below the 3 percent target. however, on the other hand, the mexican peso has recorded an important depreciation over the last couple of years, and continues to be subject to significant pressures. naturally, this raises question marks about the accompanying risks to inflation. the views expressed in this document are strictly personal. let me elaborate on the macroeconomic situation under which monetary policy is carried out at present. after the decline observed in the second quarter of the year, economic activity has resumed a moderate rate of expansion, fueled by private consumption and services, on the demand and supply fronts, respectively. an accurate assessment of the economy ’ s position during the first half of this year is challenging, among other reasons since national account figures are distorted by seasonal factors which are difficult to correct. however, there are grounds to believe that economic activity has begun a phase of deceleration. the most recent information suggests a lower growth trend for both private consumption and services, and the remaining components of aggregate demand and supply remain stagnant. although labor market indicators provide mixed signals, they are generally consistent with a gradual deceleration of economic growth. the overall rate of unemployment has continued to fall, approaching levels observed prior to the crisis, but the pace of employment growth has lost some momentum and nominal wage increases remain contained. in this context,

of an upward trend for inflation even in the absence of further shocks ; risks for inflation and its expectations deriving from a sharp depreciation of the exchange rate ; the possibility of a higher than anticipated level for the peso - dollar rate for a significant period ; potential nonlinear effects of the exchange rate on prices ; and the adverse signaling that could result from the absence of decisive action in the face of evident perils for inflation. naturally, adjustment of the monetary policy stance has been considered fundamental to fulfill the constitutional mandate of the banco de mexico, based on the premise that maintaining a low and stable inflation rate represents the best contribution of the central bank to economic growth. in spite of the accumulated tightening of the monetary policy stance in mexico since late last year, the impact of the higher target for the reference rate on domestic economic activity has been alleviated by a flattening of the yield curve. interest rate increases have been concentrated on the short end of the curve, while rates for longer maturities have actually declined. looking forward, it is difficult to evaluate the possible trend of the monetary policy rate in mexico in the very short term, especially in view that some of the factors that have recently affected the most the peso - dollar rate, and particularly the electoral process in the united states, could dissipate or accentuate in coming weeks. looking beyond this special period, against the background of an output gap that is expected to remain negative throughout next year, interest rates in mexico are likely to be significantly affected by the evolution of interest rates in the united states. markets continue to anticipate a further tightening of the monetary policy stance in that country, although at a very gradual pace. to the extent that it responds to the need to contain inflation and maximize employment, this should be good news for the world and mexico ’ s economies. furthermore, as the experience with the increase of the federal funds rate in late 2015 shows, if well communicated, it need not be a source of disruption in international financial markets. however, for the reasons i underlined above, should conditions similar to those prevailing at present persist, an increase in the federal funds rate without a monetary policy response in mexico would give rise to major risks. more generally, in accordance with the central bank ’ s mandate, monetary policy in mexico will continue to focus on the attainment of the inflation target. this implies a careful monitoring of all determinants of inflation and its medium - to long - term expectations. however, special attention