manuel sanchez : mexico in an unfriendly world economy remarks by mr manuel sanchez, deputy governor of the bank of mexico, at the 2016 mexico opportunities conference “ harvesting growth ”, organized by j. p. morgan, mexico city, 21 june 2016. * * * it is a pleasure to be here with you this morning. i would like to thank j. p. morgan for the invitation to participate in this annual conference devoted to opportunities for attaining higher economic growth in mexico. in my talk, i would like to focus on the challenges and prospects for the mexican economy in the current difficult international environment. to this end, i will touch first on mexico ’ s economic developments and outlook ; then, i will briefly analyze the impact of widespread uncertainty on the country ’ s financial markets ; and finally, i will make some comments on inflation and monetary policy. before i begin, i should note that my remarks are entirely my own and do not necessarily reflect the positions of the bank of mexico or its governing board. economic developments and outlook a natural starting point for my comments is found in international economic conditions, which during the last couple of years can be characterized as less favorable for emerging markets. in particular, advanced nations continue to witness a slow recovery amid decelerating growth in emerging economies and stagnant global trade. added to this condition are doubts and concerns over monetary policy stances and expected monetary divergence among developed countries. worries over the health of the chinese economy, in turn, persist amid uncertainty growing on geopolitical issues, with brexit currently the number - one fear. in addition, commodity prices are expected to remain low for some time. finally, this environment has fueled heightened risk aversion, which has hit emerging economies especially hard. in this complicated world, the mexican economy has maintained relatively stable and moderate growth since 2014, reaching 2. 8 percent in the first quarter of 2016 on a year - onyear basis. the main driver has been an expanding services sector, as industrial production had decelerated somewhat, although picking up recently. three factors behind softer industrial growth are clear. first and foremost, oil extraction has seen a longstanding decline. construction activity, for its part, has slowed and is somewhat erratic, apparently still affected by the restructuring process to which this sector has been subject in the last few years. to round out the list, manufacturing production, which holds a tight relationship with industry and manufacturing in the united states, has been less dynamic. given significant

in a row, inflation has remained below the permanent 3 percent target. this is quite an achievement, as convergence to this objective assumes inflation to fluctuate see shcp ( 2016 ). “ documento relativo al cumplimiento de las disposiciones contenidas en el articulo 42, fraccion i, de la ley federal de presupuesto y responsabilidad hacendaria, ” april. bis central bankers ’ speeches sufficiently close to 3 percent, sometimes above and sometimes below. before 2015, inflation persistently ran around an average above 4 percent. lower inflation has resulted from both relatively contained core price increases and declining noncore inflation. a surge in core merchandise inflation reflects a modest effect from peso depreciation on tradable goods prices. at the same time, the core services component has remained subdued, benefiting from persistently falling telecom tariffs resulting from competition enhanced by reforms in that sector. it may also suggest the absence of significant overall aggregate demand pressures to date. falling noncore inflation reflects reduced agricultural price increases, as well as contractions in the index for energy and government - determined prices. short - and medium - term inflation expectations, as reflected in analysts ’ surveys, are gradually moving towards the 3 percent permanent target, while those extracted from market instruments seem to have converged to the target, a significant advance in light of a history of high inflation. 6 some threats to the consolidation of inflation convergence to the target prevail. upward risks are particularly substantial in view of the relatively short time inflation has remained anchored on the target. the biggest menace may come from further peso weakness, which could result in greater pass - through and misalignment of inflation expectations. another risk could emerge in aggregate demand pressure, as total absorption has increased. agricultural price rises may also pick up, reverting to the medium - term average, carrying second - round price effects. thus, monetary policy must avoid complacency, remaining on watch to consolidate inflation convergence. results, although recently positive, include no guarantee for the future. in addition, exchange rate considerations have to be viewed from the perspective of the bank of mexico ’ s price stability mandate. for time - consistency considerations, the relative monetary stance vis - a - vis the united states should continue to be a factor. however, challenges to price stability may surface whatever the u. s. federal reserve does. hence, monetary policy actions