Post on 10-May-2020
Monetary Policy in Mexico
Santander’s 15th Annual “Cinco de Mayo” Mexico ConferenceNew York City, 7 May 2015
1
Javier Guzmán Calafell, Deputy Governor, Banco de México
2
The implementation of monetary policy in Mexicorests on four main pillars:
Central Bank Independence.
An inflation targeting regime pursuing inflation of 3%.
An efficient convergence of inflation to the target.
Transparency and accountability.
1. 2.
3. 4.
Monetary Policy in Mexico
3
Monetary policy and the strengthening of public finances haveallowed the reduction of inflation to levels around the target...
Monetary Policy in Mexico
Source: Banco de México.1/ Target for the overnight interbank interest rate adopted on 21 January 2008.2/ Data through the first fortnight of April.3/ Data through 5 May 2015.
Overnight Interest Rate and Headline InflationAnnual %
0
4
8
12
16
20
24
28
32
36
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
Headline inflation
Overnight interbank interest rate1/
Variability Interval
April 2/May 3/
4
…and other important accomplishments:
Monetary Policy in Mexico
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.
5
Thus, the impact of the recent depreciation of the peso ondomestic prices has been modest.
Monetary Policy in Mexico
Source: Banco de México.1/ Data through the first fortnight of April.2/ Data through 5 May 2015.
Foreign Exchange and Consumer PricesAnnual %
‐3
0
3
6
9
12
15
18
21
Sep‐14
Oct‐14
Nov‐14
Dec‐14
Jan‐15
Feb‐15
Mar‐15
Apr‐15
May‐15
FX (MXN per USD)
Headline CPI Non‐food Merchandise
Durable Merchandise April 1/May 2/
6
Similarly, the increase in prices derived from the 2014 taxreform and other supply shocks proved to be transitory.
Monetary Policy in Mexico
Source: Banco de México.1/ Data through the first fortnight of April.
Deviation from 3% Target in Headline InflationPercent points
‐0.5
0.0
0.5
1.0
1.5
2.0
Jul‐1
3
Aug‐13
Sep‐13
Oct‐13
Nov‐13
Dec‐13
Jan‐14
Feb‐14
Mar‐14
Apr‐14
May‐14
Jun‐14
Jul‐1
4
Aug‐14
Sep‐14
Oct‐14
Nov‐14
Dec‐14
Jan‐15
Feb‐15
Mar‐15
Apr‐15
April 1/
7Monetary Policy in Mexico
s.a./ Seasonally adjusted.Source: Banco de México with data from INEGI.
Output GapPercent of potential, s.a.
Looking ahead, the main challenge for monetary policy is to consolidate theprogress made in the reduction of inflation. Although economic activity isexpected to strengthen gradually, no demand pressures on inflation areforeseen for this year.
‐10
‐8
‐6
‐4
‐2
0
2
4
6
8
2007 2008 2009 2010 2011 2012 2013 2014 2015
IGAE
4Q 14Feb
95% Confidence Interval
GDP
8
In addition, supply shocks, though frequent, have only atemporary impact on prices.
Monetary Policy in Mexico
Inflation Expectations and Inflation ShocksAnnual %
Sources: Banco de México and INEGI.1/ Inflation data through the first fortnight of April.
0
2
4
6
8
10
12
14
16
‐20
‐10
0
10
20
30
40
50
60
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
April 1/
Inflation Expectations:12 months ‐>
2 years ‐>4 years ‐>
<‐ Fruits and Vegetables
99
Therefore, the main risk for inflation (and financial stability) in coming months will probably derive from the implications of normalization of monetary policy in the US.
Federal Funds RateAnnual %
Sources: FOMC, Bloomberg and Blue Chip.
Monetary Policy in Mexico
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
4.0
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
2021
2022
2023
2024
2025
Federal Funds RateFOMC Projections (18‐Mar‐15)Blue Chip (10‐Apr‐15)OIS‐implied (5‐May‐15)Futures (5‐May‐15)
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These challenges are heightened by Mexico’s financial openness…
Financial OpennessChinn‐Ito Index1/, 2012
*/ Average for the major advanced economies: Canada, France, Germany, Italy, Japan, United Kingdom, and United States.1/ Measures a country's degree of de jure financial account openness (0‐1 scale), based on the IMF's Annual Report on Exchange Arrangements and Exchange Restrictions (AREAER).Source: Chinn and Ito (2006) : "What Matters for Financial Development? Capital Controls, Institutions, and Interactions“, JDE 81(1):163‐192 (October).
Monetary Policy in Mexico
1.00
1.00
0.71
0.69
0.69
0.65
0.45
0.45
0.41
0.41
0.41
0.16
0.16
0.16
0.0
0.1
0.2
0.3
0.4
0.5
0.6
0.7
0.8
0.9
1.0
Advanced
*
Peru
Korea
Mexico
Chile
Russia
Turkey
Poland
Brazil
Indo
nesia
Colombia
India
China
S. Africa
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… and the relatively high participation of non‐residents in the domestic government securities market...
Non‐residents Share of Holdings% of total outstanding local currency government bonds
*/ Average of Brazil, Hungary, Indonesia, Malaysia, Mexico, Poland, Russia, South Africa, Thailand and Turkey, weighted by non‐residents’ dollar‐value of holdings.1/ Data for Mexico through March 2015.Source: Banco de México and Credit Suisse.
Monetary Policy in Mexico
45.1
40.0
39.8
36.1
34.5
32.1
30.8
29.7
20.9
20.3
19.6
17.6
16.8
15.2
0
5
10
15
20
25
30
35
40
45
50
Malaysia
Indo
nesia
Poland
Peru
Hungary
Mexico
EM‐10*
S. Africa
Turkey
Brazil
Russia
Thailand
Colombia
Korea
Feb1/
12
…although it is important to note the long‐term nature of theseflows in Mexico’s case, since a sizable portion originates frominstitutional investors.
Non‐residents Holdings of Mexican Peso‐denominated BondsPercent1/
1/ As of 31 March 2015. Total outstanding nominal value of bonds held by non‐residents: MXN 1,423 billion.Sources: Bloomberg, SEC, Toushin Funds, Ministry of Finance Japan, Norges Bank.
Monetary Policy in Mexico
5.3%
7.6%
0.5%1.7%1.4%1.5%1.0%1.7%
14.7%
0.1%2.1%
14.3%
47.9%
NORGES BANK INVESTMENT MANAGEMENT
FRANKLIN RESOURCES
PIMCO ADVISORS
LOOMIS SAYLES
STANDARD LIFE INVESTMENTS
LEGG MASON
STONE HARBOR INVESTMENT PART
BLACKROCK
Japan Ministry of Finance
Japan Pension Funds
Toushin Funds (Japan)
Other US based funds
Not identified
13
The implementation of market‐based mechanisms for the provision ofliquidity has contributed to curb volatility of the exchange rate.
Monetary Policy in Mexico
Source: Banco de México.
Foreign ExchangeMXN per USD
Implied Volatility in 1‐month USD/MXN OptionsPercent
Source: Banco de México.
12.5
13.0
13.5
14.0
14.5
15.0
15.5
16.0
Sep‐14
Oct‐14
Nov‐14
Dec‐14
Jan‐15
Feb‐15
Mar‐15
Apr‐15
May‐15
11‐Dec‐14:USD 200 mn
allocated
May
6‐Mar‐15:USD 200 mn
allocated
11‐Mar‐15:USD 52 mndaily
5.0
6.0
7.0
8.0
9.0
10.0
11.0
12.0
13.0
14.0
15.0
Sep‐14
Oct‐14
Nov‐14
Dec‐14
Jan‐15
Feb‐15
Mar‐15
Apr‐15
May‐15
11‐Dec‐14:USD 200 mn
allocated
May
6‐Mar‐15:USD 200 mn
allocated
11‐Mar‐15:USD 52 mndaily
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However, the stance of monetary policy in Mexico will need tobe adjusted at some stage. The timing is subject to a number ofuncertainties:
Monetary Policy in Mexico
The date of the first adjustment of the reference interest rate in the US, aswell 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 inthese variables (e.g. will markets anticipate?).
In view of these uncertaintes, monetary policy must be ready to respondin a timely and flexible way as needed.
15
Mexico is well prepared to face the challenges posed by thenormalization of monetary policy in the US.
Monetary Policy in Mexico
1. Prudent monetary and fiscal policies (expenditure adjustments of0.7 percent of GDP announced for both 2015 and 2016 to meet thefiscal 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 USdollar FCL with the IMF.
5. A sound financial system.
Furthermore, the economy’s growth potential should be substantiallystrengthened by the major structural reform efforts underway.
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The decline of inflation is a necessary, but not sufficient, condition to achieve adequate rates of economic growth.
Headline Inflation and Real GDP GrowthAnnual %
*/ Information through the first fortnight of April.Source: Banco de México and INEGI.
Monetary Policy in Mexico
‐20
0
20
40
60
80
100
120
140
160
180
‐10
0
10
20
30
40
50
60
70
80
90
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
Headline Inflation ‐>
<‐ Real GDP Growth
April*4Q 2014
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However, there are good reasons to expect a major change of trend in coming years. The economy’s potential is already evident in the evolution of exports…
US Imports fromMexico% of total
Source: Direction of Trade Statistics, IMF.
Monetary Policy in Mexico
9.0
9.5
10.0
10.5
11.0
11.5
12.0
12.5
13.0
13.5
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
Dec
18
Light Vehicle Production and Installed CapacityThousand annualized units
*/ Seasonally adjusted data.Source: Banco de México with data from AMIA. Estimation of installed capacity based on manufacturers’ press releases and newspapers’ reports.
…and particularly in sectors such as the automobile industry.
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
2,040
2,575
3,110
3,645
4,180
4,715
5,250
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
Ford
VW
Chrysler GM
MazdaNissan
ChryslerFord
HondaToyota
Mazda Audi
Nissan‐Infiniti
Kia
Nissan‐Mercedes BenzBMW
VW
Toyota
Installed Capacity
Production*/
Monetary Policy in Mexico
19Monetary Policy in Mexico
And very importantly, a major process of structural reform has been launched to increase the economy’s growth potential.
Economic Reform ResponsivenessShare of OECD reform recommendations with significant action taken during 2013‐2014
Source: OECD (2015), OECD Economic Surveys: Mexico, January.
0
10
20
30
40
50
60
G7 OECD European Union Emerging OECD Southern Europe Mexico
20
Economic growth should also be supported by favorable demographics.
Labor Force1/ GrowthAnnual %
1/ Economically active population aged 15‐64.Source: International Labour Organization.
‐1.0
‐0.5
0.0
0.5
1.0
1.5
2.0
2.5
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
Peru
Mexico
Malaysia
Korea
Colombia
TurkeyIndonesia
ChileBrazil South Africa
Poland
Monetary Policy in Mexico
21
Real GDP Growth in Major EconomiesAnnual %
Monetary Policy in Mexico
Source: IMF (WEO, April 2015).
It is also worth noting that the external environment is expected to be less unfavorable to Mexico relative to other EMEs in coming years, given the projected evolution of the major economies…
‐2
0
2
4
6
8
10
12
14
2006
‐07
2008
‐10
2011
‐12
2013
‐14
2015
‐16
2006
‐07
2008
‐10
2011
‐12
2013
‐14
2015
‐16
2006
‐07
2008
‐10
2011
‐12
2013
‐14
2015
‐16
2006
‐07
2008
‐10
2011
‐12
2013
‐14
2015
‐16
United States Eurozone Advanced Economies China
PotentialActual
22Monetary Policy in Mexico
…and a low share a commodities in total exports.
Commodities Exports1/% of total merchandise exports, 2013
*/ The figure for Mexico corresponds to 2014.1/ Includes: Agricultural commodities, food, fuels and metals.Source: Banco de México and World Bank (World Development Indicators).
11.7 13.7 15.0
15.2 20
.4 22.9 25.0
38.7
53.6
61.6
62.2
82.4 85.4
86.1
0
10
20
30
40
50
60
70
80
90
CzechRep.
Korea Hungary Mexico* Turkey Poland Thailand Malaysia S. Africa Brazil Indonesia Colombia Peru Chile
23
Implementation of the structural reform measures has begun.
Accordingly, some results are already evident.
Furthermore, important efforts have been made to improve theinstitutional framework.
However, this is just the beginning of a long process.
Continuous efforts are required to ensure macroeconomic andfinancial stability.
In addition, the efficient implementation of reforms is a majorchallenge, and measures in other areas will likely be needed.
23Monetary Policy in Mexico
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