Monetary Policy in Mexico: Javier Guzmán Calafell, Deputy Governor, Banco de México

Monetary Policy in Mexico
JavierGuzmnCalafell,Deputy Governor,BancodeMxico
Santanders15thAnnualCincodeMayoMexicoConference
NewYorkCity,7May2015
1
The implementation of monetary policy in Mexico

rests on four main pillars:
1.
CentralBank
Independence.
3.
Anefficient
convergenceof
inflationtothetarget.
2.
Aninflationtargeting
regimepursuing
inflationof3%.
4.
Transparencyand
accountability.
MonetaryPolicyinMexico
Monetary policy and the strengthening of public finances have

allowed the reduction of inflation to levels around the target...
OvernightInterestRateandHeadlineInflation
Annual%
36
April 2/
May 3/
32
28
24
20
Headlineinflation
16
Overnightinterbankinterestrate1/
12
8
4
VariabilityInterval
2015
2014
2013
2012
2011
2010
2009
2008
2007
2006
2005
2004
2003
2002
2001
2000
1999
Source:BancodeMxico.
1/Targetfortheovernightinterbankinterestrateadoptedon21January2008.
2/DatathroughthefirstfortnightofApril.
3/Datathrough5May2015.
and other important accomplishments:
A decline in the volatility of inflation.

A sharp reduction in the pass through of the exchange rate to prices.
A substantial decline in the persistence of inflation.
A lower dispersion of inflation expectations.
Thus, the impact of the recent depreciation of the peso on

domestic prices has been modest.
ForeignExchangeandConsumerPrices
Annual%
21
18
FX (MXNperUSD)
15
12
Headline CPI
Nonfood Merchandise
3
April 1/
May 2/
DurableMerchandise
May15
Apr15
Mar15
Feb15
Jan15
Dec14
Nov14
Oct14
Sep14
2/Datathrough5May2015.
Similarly, the increase in prices derived from the 2014 tax

reform and other supply shocks proved to be transitory.
Deviationfrom3%TargetinHeadlineInflation
Percentpoints
2.0
1.5
1.0
0.5
0.0
April 1/
Apr15
Mar15
Feb15
Jan15
Dec14
Nov14
Oct14
Sep14
Aug14
Jul14
Jun14
May14
Apr14
Mar14
Feb14
Jan14
Dec13
Nov13
Oct13
Sep13
Aug13
Jul13
0.5
Looking ahead, the main challenge for monetary policy is to consolidate the
progress made in the reduction of inflation. Although economic activity is
expected to strengthen gradually, no demand pressures on inflation are
foreseen for this year.
OutputGap
Percent ofpotential,s.a.
8
6
4
GDP
2
0
2
IGAE
4
6
95%Confidence Interval
4Q14
Feb
2007
2008
2009
2010
2011
2012
2013
2014
8
10
2015
s.a./ Seasonally adjusted.

Source: Banco de Mxico with data from INEGI.
In addition, supply shocks, though frequent, have only a

temporary impact on prices.
InflationExpectationsandInflationShocks
Annual%
60
16
April 1/
50
Inflation Expectations:
12months >
2years >
4years >
< Fruits andVegetables
40
14
12
2015
2014
2013
2012
2011
2010
2009
20
2008
2007
10
2006
2005
2004
2003
10
2002
2001
20
2000
10
1999
30
Sources:BancodeMxicoandINEGI.
1/InflationdatathroughthefirstfortnightofApril.
Therefore,themainriskforinflation(andfinancialstability)incomingmonths
willprobablyderivefromtheimplicationsofnormalizationofmonetarypolicy
intheUS.
FederalFunds Rate
Annual %
4.0
3.5
FederalFunds Rate
FOMCProjections (18Mar15)
BlueChip(10Apr15)
OISimplied (5May15)
Futures (5May15)
3.0
2.5
2.0
1.5
1.0
0.5
2025
2024
2023
2022
2021
2020
2019
2018
2017
2016
2015
2014
2013
2012
2011
2010
2009
2008
0.0
Sources: FOMC, Bloomberg and Blue Chip.

ThesechallengesareheightenedbyMexicosfinancial
openness
1.0
1.00
1.00
FinancialOpenness
ChinnItoIndex1/,2012
0.9
0.65
0.69
0.7
0.69
0.71
0.8
0.6
0.4
0.41
0.41
0.41
0.45
0.45
0.5
0.3
0.16
0.16
0.16
0.2
0.1
S.Africa
China
India
Colombia
Indonesia
Brazil
Poland
Turkey
Russia
Chile
Mexico
Korea
Peru
Advanced*
0.0
*/Averageforthemajoradvancedeconomies:Canada,France,Germany,Italy,Japan,UnitedKingdom,andUnitedStates.
1/Measuresacountry'sdegreeofdejure financialaccountopenness(01scale),basedontheIMF'sAnnualReportonExchangeArrangementsandExchange
Restrictions(AREAER).
Source:ChinnandIto(2006):"WhatMattersforFinancialDevelopment?CapitalControls,Institutions,andInteractions,JDE 81(1):163192(October).
10
andtherelativelyhighparticipationofnonresidentsinthe
domesticgovernmentsecuritiesmarket...
NonresidentsShareofHoldings
%oftotaloutstandinglocalcurrencygovernmentbonds
50
Feb1/
30
29.7
15
15.2
16.8
17.6
20
19.6
20.3
25
20.9
30.8
32.1
35
34.5
36.1
40
39.8
40.0
45.1
45
10
5
Korea
Colombia
Thailand
Russia
Brazil
Turkey
S.Africa
EM10*
Mexico
Hungary
Peru
Poland
Indonesia
Malaysia
*/AverageofBrazil,Hungary,Indonesia,Malaysia,Mexico,Poland,Russia,SouthAfrica,ThailandandTurkey,weightedbynonresidentsdollarvalueofholdings.
1/DataforMexicothroughMarch2015.
Source:BancodeMxicoandCreditSuisse.
11
although it is important tonotethe longterm nature ofthese

flows inMexicos case,since asizable portion originates from
institutional investors.
NonresidentsHoldingsofMexicanPesodenominatedBonds
Percent1/
5.3%
7.6%
NORGESBANKINVESTMENTMANAGEMENT
FRANKLINRESOURCES
0.5%
1.7%
1.4%
1.5%
1.0%
1.7%
PIMCOADVISORS
LOOMISSAYLES
STANDARDLIFEINVESTMENTS
LEGGMASON
STONEHARBORINVESTMENTPART
47.9%
BLACKROCK
14.7%
JapanMinistryofFinance
JapanPensionFunds
ToushinFunds(Japan)
0.1%
2.1%
OtherUSbasedfunds
Notidentified
14.3%
1/Asof31March2015.Totaloutstandingnominalvalueofbondsheldbynonresidents:MXN1,423billion.
Sources:Bloomberg,SEC,Toushin Funds,MinistryofFinanceJapan,Norges Bank.
12
The implementation of marketbased mechanisms for the provision of

liquidity has contributed to curb volatility of the exchange rate.
ForeignExchange
MXNperUSD
11Dec14:
USD200mn
allocated
6Mar15:
USD200mn
allocated
ImpliedVolatilityin1monthUSD/MXNOptions
Percent
11Mar15:
USD52mn
daily
16.0
11Dec14:
USD200mn
allocated
15.5
6Mar15:
USD200mn
allocated
15.0
11Mar15:
USD52mn
daily
14.0
13.0
15.0
12.0
11.0
14.5
10.0
14.0
9.0
8.0
13.5
7.0
13.0
6.0
May
May
May15
Apr15
Feb15
Jan15
Mar15
Dec14
Nov14
Oct14
5.0
Sep14
May15
Apr15
Feb15
Jan15
Mar15
Dec14
Nov14
Oct14
Sep14
12.5
13
However, the stance of monetary policy in Mexico will need to

be adjusted at some stage. The timing is subject to a number of
uncertainties:
The date of the first adjustment of the reference interest rate in the US, as
well as the pace of subsequent increases.
The impact of normalization of monetary policy in the US on the peso

dollar rate, domestic interest rates, and other financial variables.
The moment when monetary policy actions in the US will be reflected in

these variables (e.g. will markets anticipate?).
In view of these uncertaintes, monetary policy must be ready to respond

in a timely and flexible way as needed.
14
Mexico is well prepared to face the challenges posed by the

normalization of monetary policy in the US.
1. Prudent monetary and fiscal policies (expenditure adjustments of

0.7 percent of GDP announced for both 2015 and 2016 to meet the
fiscal targets in the face of lower oil prices and output).
2. A moderate current account deficit.

3. A well functioning floating exchange regime.
4. International reserves around record levels and a 66.2 billion US
dollar FCL with the IMF.
5. A sound financial system.
Furthermore, the economys growth potential should be substantially

strengthened by the major structural reform efforts underway.
15
Thedeclineofinflationisanecessary,butnotsufficient,
conditiontoachieveadequateratesofeconomicgrowth.
HeadlineInflationandRealGDPGrowth
Annual%
180
90
April*
4Q2014
80
160
70
140
60
120
50
100
40
80
30
60
Headline Inflation >

40
20
< RealGDPGrowth
10
20
0
20
2015
2014
2013
2012
2011
2010
2009
2008
2007
2006
2005
2004
2003
2002
2001
2000
1999
1998
1997
1996
1995
1994
1993
1992
1991
1990
1989
1988
1987
1986
1985
1984
1983
1982
1981
10
*/InformationthroughthefirstfortnightofApril.
Source:BancodeMxicoandINEGI.
16
However,therearegoodreasonstoexpectamajorchangeof
trendincomingyears.Theeconomyspotentialisalready
evidentintheevolutionofexports
USImports from Mexico
%oftotal
13.5
13.0
12.5
12.0
11.5
11.0
10.5
10.0
9.5
Dec
2014
2013
2012
2011
2010
2009
2008
2007
2006
2005
2004
2003
2002
2001
2000
9.0
Source: Direction of Trade Statistics, IMF.
17
andparticularly insectors such asthe automobile industry.

LightVehicle Production andInstalled Capacity
Thousand annualized units
100%
Toyota
BMW
NissanMercedesBenz
90%
VW
4,715
NissanInfiniti
80%
Installed Capacity
70%
Mazda
Audi
4,180
Kia
60%
50%
40%
GM
Chrysler
Honda
Mazda
Nissan
Chrysler
Ford
Toyota
3,645
3,110
VW
30%
5,250
Ford
20%
2,575
Production*/
10%
2,040
2019
2018
2017
2016
2015
2014
2013
2012
2011
2010
0%
*/ Seasonally adjusted data.

Source: Banco de Mxico with data from AMIA. Estimation of installed capacity based on manufacturers press releases and newspapers reports.
18
Andvery importantly,amajor process ofstructural reform has

been launched toincrease the economys growth potential.
Economic Reform Responsiveness
ShareofOECDreformrecommendationswithsignificantactiontakenduring20132014
60
50
40
30
20
10
0
G7
OECD
EuropeanUnion
EmergingOECD
SouthernEurope
Mexico
Source: OECD (2015), OECD Economic Surveys: Mexico, January.

19
Economicgrowthshouldalsobesupportedbyfavorable
demographics.
LaborForce1/ Growth
Annual %
2.5
Mexico
Colombia
Malaysia
2.0
Peru
1.5
Turkey
Indonesia
Brazil
1.0
SouthAfrica
Chile
0.5
Korea
0.0
Poland
0.5
2020
2019
2018
2017
2016
2015
2014
2013
2012
2011
1.0
1/ Economically active population aged 1564.

Source: International Labour Organization.
20
Itisalsoworthnotingthattheexternalenvironmentisexpected
tobelessunfavorabletoMexicorelativetootherEMEsin
comingyears,giventheprojectedevolutionofthemajor
economies
RealGDPGrowth inMajor Economies
Annual %
14
12
Potential
Actual
10
8
6
4
2
0
UnitedStates
Eurozone
AdvancedEconomies
201516
201314
201112
200810
200607
201516
201314
201112
200810
200607
201516
201314
201112
200810
200607
201516
201314
201112
200810
200607
China
Source: IMF (WEO, April 2015).
21
andalowshareacommoditiesintotalexports.
Commodities Exports1/
%oftotalmerchandise exports,2013
86.1
85.4
82.4
90
80
62.2
60
53.6
61.6
70
50
30
25.0
22.9
20.4
15.2
15.0
13.7
11.7
38.7
40
20
10
0
Czech
Rep.
Korea
Hungary Mexico*
Turkey
Poland
Thailand Malaysia S.Africa
Brazil
Indonesia Colombia
Peru
Chile
*/ The figure for Mexico corresponds to 2014.

1/ Includes: Agricultural commodities, food, fuels and metals.
Source: Banco de Mxico and World Bank (World Development Indicators).
22
Implementation of the structural reform measures has begun.
Accordingly, some results are already evident.
Furthermore, important efforts have been made to improve the

institutional framework.
However, this is just the beginning of a long process.
Continuous efforts are required to ensure macroeconomic and

financial stability.
In addition, the efficient implementation of reforms is a major

challenge, and measures in other areas will likely be needed.
23
24

Monetary Policy in Mexico: Javier Guzmán Calafell, Deputy Governor, Banco de México

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Monetary Policy in Mexico: Javier Guzmán Calafell, Deputy Governor, Banco de México

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Monetary Policy in Mexico

The implementation of monetary policy in Mexico

Monetary policy and the strengthening of public finances have

and other important accomplishments:

A decline in the volatility of inflation.

Thus, the impact of the recent depreciation of the peso on

Similarly, the increase in prices derived from the 2014 tax

s.a./ Seasonally adjusted.

In addition, supply shocks, though frequent, have only a

< Fruits andVegetables

Sources: FOMC, Bloomberg and Blue Chip.

although it is important tonotethe longterm nature ofthese

The implementation of marketbased mechanisms for the provision of

However, the stance of monetary policy in Mexico will need to

The impact of normalization of monetary policy in the US on the peso

The moment when monetary policy actions in the US will be reflected in

In view of these uncertaintes, monetary policy must be ready to respond

Mexico is well prepared to face the challenges posed by the

1. Prudent monetary and fiscal policies (expenditure adjustments of

2. A moderate current account deficit.

5. A sound financial system.

Furthermore, the economys growth potential should be substantially

Headline Inflation >

Source: Direction of Trade Statistics, IMF.

andparticularly insectors such asthe automobile industry.

*/ Seasonally adjusted data.

Andvery importantly,amajor process ofstructural reform has

Source: OECD (2015), OECD Economic Surveys: Mexico, January.

1/ Economically active population aged 1564.

Source: IMF (WEO, April 2015).

Thailand Malaysia S.Africa

*/ The figure for Mexico corresponds to 2014.

Implementation of the structural reform measures has begun.

Accordingly, some results are already evident.

Furthermore, important efforts have been made to improve the

However, this is just the beginning of a long process.

Continuous efforts are required to ensure macroeconomic and

In addition, the efficient implementation of reforms is a major

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