Presentación de PowerPoint · Central banks of developed economies have adjusted their monetary policy stance at different paces, according to each country’scyclical position and

Quarterly Report

May 30th, 2018Alejandro Díaz de León, Governor, Banco de MéxicoJanuary – March 2018

Quarterly Report January - March 2018 1

Outline

External Conditions1

Evolution of the Mexican Economy2

Forecasts and Final Remarks5

Inflation3

Monetary Policy4

0

1

2

3

20

18

20

19

20

18

20

19

20

18

20

19

20

18

20

19

U.S. Eurozone Japan U.K.

0

1

2

3

4

5

6

7

8

20

10

20

11

20

12

20

13

20

14

20

15

20

16

20

17

20

18

20

19

Forecasts

2

During Q1 2018, the world economy kept growing in a generalized manner. The outlook for the rest of 2018 and2019 still suggests a recovery of world economic activity.

GDP Growth Forecasts Annual % change

G4: 2018 and 2019 GDP Growth ForecastsAnnual % change

Source: IMF, WEO October 2017 and April 2018. Source: IMF, WEO October 2017 and April 2018. Source: IMF, WEO October 2017 and April 2018.

Quarterly Report January - March 2018

Emerging Economies: 2018 and 2019 GDP Growth Forecasts

Annual % change

0

2

4

6

8

20

18

20

19

20

18

20

19

20

18

20

19

20

18

20

19

20

18

20

19

India China Russia Brazil Mexico

October 2017April 2018

Advanced

Emerging

World

April 2018October 2017

April 2018October 2017


-8

-6

-4

-2

0

2

4

6

20

05

20

06

20

07

20

08

20

09

20

10

20

11

20

12

20

13

20

14

20

15

20

16

20

17

20

18

20

19

United States

Japan

United Kingdom

Eurozone

3

In this juncture, the slack in advanced economies continued to reduce and this has started to be reflected inseveral of them in gradual wage increases.

Output Gap 1/

% of potential GDP

-3

-2

-1

0

1

2

3

4

5

20

08

20

09

20

10

20

11

20

12

20

13

20

14

20

15

20

16

20

17

20

18

Unemployment GapPercentage points

1/ The model is estimated through a system of multiple equations that explain the difference between observed GDP andpotential GDP as the result of three types of shocks, to: (1) the level of inflation, (2) the unemployment rate and (3) growthand inflation expectations.Source: IMF, WEO April 2018.

Source: Elaborated by Banco de México with data from the CBO, OECD, Economic Outlook, November 2017, and nationalstatistical services.

Advanced Economies

AprilMarch

Forecasts

April

United States

EurozoneUnited Kingdom

Japan

-1

0

1

2

3

4

20

13

20

14

20

15

20

16

20

17

20

18


World economic expansion continued to foster the demand for commodities that, along with supply factors,has contributed to higher prices. This, combined with the reduction of slack in advanced economies, hasstarted to be reflected in several of them in gradual increases in both inflation and inflation expectations.

20

40

60

80

100

120

140

160

20

10

20

11

20

12

20

13

20

14

20

15

20

16

20

17

20

18

Commodities PricesIndex 2014=100 Core

Source: World Bank. 1/ U.S. figures correspond to the implicit price deflator for personalconsumption expenditures.Source: Haver Analytics and International Monetary Fund.

Headline

1/ U.S. figures correspond to the implicit price deflator for personalconsumption expenditures.Source: Haver Analytics and International Monetary Fund.

-2

-1

0

1

2

3

4

20

13

20

14

20

15

20

16

20

17

20

18

Advanced Economies: InflationAnnual % change

April

Energy

Agriculture

Metals y Minerals

Food

April

Eurozone

United Kingdom

Japan

United States 1/

MarchApril

Eurozone

United Kingdom

Japan

United States 2/

March


The U.S. economy’s growth rate moderated in Q1 2018, although in the future it is still anticipated to registera solid expansion. In this environment, slack in the labor market continued declining and the wage growthrate increased.

-4

-3

-2

-1

0

1

2

3

4

5

6

7

20

13

20

14

20

15

20

16

20

17

20

18

20

19

Real GDP and its ComponentsAnnualized quarterly % change and contributions in

percentage points, s. a.

Wage IndicatorsAnnual % change, s. a.

s. a. / Seasonally adjusted data.Source: Bureau of Economic Analysis and Blue Chip Economic Indicators.

s. a. / Seasonally adjusted data.Source: Bureau of Labor Statistics and Federal Reserve Bank of Atlanta.

United States

1

2

3

4

5

6

20

08

20

10

20

12

20

14

20

16

20

18

Public Expenditure

Net Exports

Inventories

Fixed Investment

PrivateConsumption

Total

Q1-2018

Forecasts

Q1-2018

Employment Cost Index

Average HourlyRemunerations

Atlanta FED Wage Tracker

0

10

20

30

40

50

60

70

80

20

13

20

14

20

15

20

16

20

17

20

18


In this context, inflation continued to increase in the U.S.

0.0

0.4

0.8

1.2

1.6

2.0

2.4

20

13

20

14

20

15

20

16

20

17

20

18

Personal Consumption Expenditures DeflatorAnnual % change, s. a.

Inflation ExpectationsImplied in Financial Instruments 1/

Annual % change

Distribution for 2-Year Inflation ExpectationsImplied in Financial Instruments

%

s. a. / Seasonally adjusted data.Source: Bureau of Economic Analysis.

1/ Expected inflation over the five-year period that begins five years from today.Obtained from swap contracts in which one counterparty agrees to pay a fixed ratein exchange for receiving a referenced payment at an inflation rate over a specifiedperiod.Source: Bloomberg.

Note: Expectations were obtained from swap contracts in which a counterpartyagrees to pay a fixed rate in exchange for a payment referenced to the inflationrate during a given period.Source: Elaborated by Banco de México with data from Bloomberg.

United States

Headline

Core

March1.6

1.8

2.0

2.2

2.4

2.6

2.8

20

15

20

16

20

17

20

18

May

Greater than 2%

Greater than 2.5%

Between2 and 2.5% May

-0.75

-0.25

0.25

0.75

1.25

1.75

2.25

2.75

3.25

Dec

-14

Jun

-15

Dec

-15

Jun

-16

Dec

-16

Jun

-17

Dec

-17

Jun

-18

Dec

-18

Jun

-19

Dec

-19

1.00

1.25

1.50

1.75

2.00

2.25

2.50

2.75

3.00

3.25

Jan

-17

Mar

-17

May

-17

Jul-

17

Sep

-17

No

v-1

7

Jan

-18

Mar

-18

May

-18

85

88

91

94

97

100

103

106

Jan

-17

Mar

-17

May

-17

Jul-

17

Sep

-17

No

v-1

7

Jan

-18

Mar

-18

May

-18


Central banks of developed economies have adjusted their monetary policy stance at different paces,according to each country’s cyclical position and inflationary pressures. In the U.S., such process is expected tocontinue being gradual, although faster than in other advanced economies. The greater uncertainty about theU.S.’ inflation trajectory increased interest rates and strengthened the dollar.

Expected Monetary Policy Rates Implicit in OIS Curve 1/

%

U.S.: 2-Year and 10-Year Government Rates%

U.S.: DXYIndex

1/ OIS: Fixed-For-Floating swap where the fixed interest rate is the reference rate.2/ Data for the observed federal funds rate corresponds to the average between thelower and upper bounds of the range (1.50% - 1.75%).Source: Bloomberg.

Source: U.S. Department of the Treasury. Source: Bloomberg.

End of2019

End of2018

Federal Reserve 2/

Bank of Japan

European Central Bank

Bank of England

Implied target rate in OIS curve May 29th, 2018

May

10 Year

2 Year

Appreciation

May

8

Risks to World Economic Outlook Risks to the world economic outlook in the short term seem to be balanced. The expectation that the

growth will continue is consistent with the fiscal impulse in the U.S. and the recent evolution ofproductive activity and global trade.

However, for the medium and long terms, risks to growth have increased:

❶A change to the regional and global integration model.

❷Greater-than-expected deceleration of the Chinese economy.

❸ The occurrence of geopolitical events across different regions.

There are risks that could generate an environment of higher volatility in international financialmarkets, which could further limit emerging economies’ financing sources:

❶An additional increase in uncertainty over the inflation evolution in some advanced economies, whichcould lead to higher interest rates than those currently expected.

❷Deterioration in some financial intermediaries’ balance sheets caused by a global environment of higherinterest rates.

❸High indebtedness levels of the private sector and macroeconomic imbalances in some emergingeconomies.

❹ That authorities do not adjust their economic policies in light of the risks currently faced to maintaingrowth and stability in international financial markets.


75

85

95

105

115

125

135

145

20

14

20

15

20

16

20

17

20

18


This perception of higher risks has been reflected in higher volatility in international financial marketsthroughout the period analyzed in this Report.

Advanced Economies: Stock Markets Index 01-Jan-2015=100

Implied Volatility in Treasury Bonds 2/

Index

Source: Bloomberg 2/ It refers to the MOVE index. This index is calculated with at themoney options to maturity of one month on 2, 5, 10 and 30-yearTreasury bonds.Source: Bloomberg.

May

FTSE

Europe 600

Nikkei

S&P 500

30

40

50

60

70

80

90

100

110

20

14

20

15

20

16

20

17

20

18

May5

10

15

20

25

30

35

40

45

50

20

14

20

15

20

16

20

17

20

18

VIX 1/

Index

1/ The VIX Index is a weighted implied volatility indicator for theS&P 500.Source: Bloomberg.

May


In this environment of lower risk appetite, emerging economies are facing tighter financing conditions, leadingto a considerable depreciation across most of their currencies and an increase in their volatility.

Nominal Exchange Rate against USDIndex 01-Jan-2014 = 100

FX Volatility 1/

%National Sovereign Credit Risk 2/

Basis points

Source: Bloomberg. 1/ It refers to the implied volatility in 1-month options.Source: Bloomberg.

2/ It refers to the 5-year CDS.Source: Bloomberg.

Emerging Markets

0

50

100

150

200

250

300

350

400

450

500

550

20

14

20

15

20

16

20

17

20

18

Chile

Colombia

Turkey

Brazil

MexicoMayKorea

90

110

130

150

170

190

210

230

20

14

20

15

20

16

20

17

20

18

0

5

10

15

20

25

30

35

20

14

20

15

20

16

20

17

20

18

Colombia

Turkey

BrazilMexico

Korea

May

ChileChile

Colombia

Turkey

Brazil

Mexico

MayKorea

Depreciation

11Quarterly Report January - March 2018

Outline




Inflation3

Monetary Policy4

0.5

0.9

0.6

0.9

0.4

-0.8

1.0

0.6 0

.61

.30

.41

.10

.51

.01

.3-0

.10

.60

.31

.21

.00

.40

.30

.00

.91

.1

-1

0

1

2

20

12

20

13

20

14

20

15

20

16

20

17

20

18

12

In Q1 2018, economic activity continued recovering, especially driven by the dynamism of the services sectorand the recovery of industrial activity.

90

95

100

105

110

115

120

80

90

100

110

120

130

140

20

12

20

13

20

14

20

15

20

16

20

17

20

18

70

75

80

85

90

95

100

105

110

115

120

20

12

20

13

20

14

20

15

20

16

20

17

20

18

Gross Domestic Product Quarterly % change, s. a.

Global Economic Activity IndicatorIndex 2013=100, s. a.

Industrial Activity Index 2013=100, s. a.

s. a. / Seasonally adjusted data.Source: Mexico’s System of National Accounts, INEGI.

s. a. / Seasonally adjusted data.Source: Mexico’s National Accounts System (SCNM), INEGI.

s. a. / Seasonally adjusted data.Source: Monthly Industrial Activity Indicator, Mexico’s National AccountsSystem (SCNM), INEGI.


Services

Total

Industrial Activity

Agricultural

Q1-2018

Mining

Manufactures

Construction

Electricity, Water, Gas

MarchMarch

93

100

107

114

121

20

12

20

13

20

14

20

15

20

16

20

17

20

18

13

18.0

21.8

25.6

29.4

33.2

37.0

40.8

44.6

1.4

1.6

1.8

2.0

2.2

2.4

2.6

2.8

20

12

20

13

20

14

20

15

20

16

20

17

20

18

65

70

75

80

85

90

95

100

105

110

20

12

20

13

20

14

20

15

20

16

20

17

20

18

Monthly Indicator of Private Consumption and its Components Index 2013=100, s. a.

Workers’ Remittances USD and constant pesos billions, s. a

Consumer Confidence Index and Total Real Wage Bill

Index 2013 =100, s. a.

s. a. / Seasonally adjusted data.1/ Prepared and seasonally adjusted by Banco de México. Includesnational and imported goods.Source: Mexico’s National Accounts System (SCNM), INEGI.

s. a. / Seasonally adjusted data.2/ Prices as of the second fortnight of December 2010Source: Banco de México and INEGI.

s. a. / Seasonally adjusted data.Source: Prepared by Banco de México with data from the NationalEmployment Survey (ENOE), INEGI and National Consumer ConfidenceSurvey (ENCO), INEGI and Banco de México.


U.S. Dollars

Mexican Pesos 2/

March

Private consumption continued growing, albeit at a slower pace than during previous quarters.

Q1-2018

Real WageBill

ConsumerConfidence

Index

AprilFebruary

Total Goods 1/

Total

National Services

85

90

95

100

105

110

115

120

125

20

12

20

13

20

14

20

15

20

16

20

17

20

18

Non-residential

Residential

14

In December 2017 and during the first two months of 2018, investment recovered relative to the weakperformance it had registered since the end of 2015.

Investment and its Components Index 2013=100, s. a.

Investment in Residential andNon-residential Construction

Index 2013=100, s. a.

Real Value of Construction Output by Contracting Institutional Sector 1/

Index Jan-2012=100, s. a.

s. a. / Seasonally adjusted data.Source: Mexico’s National Accounts System (SCNM), INEGI. s. a. / Seasonally adjusted data.

Source: Mexico’s National Accounts System (SCNM), INEGI.

s. a. / Seasonally adjusted data.1/ Seasonally adjusted by Banco de México, except for the total.Source: Prepared by Banco de México with data from ENEC, INEGI.


90

95

100

105

110

115

120

125

130

135

140

20

12

20

13

20

14

20

15

20

16

20

17

20

18

February

Construction

Imported Machineryand Equipment

Total

Domestic Machineryand Equipment

50

75

100

125

150

175

200

20

12

20

13

20

14

20

15

20

16

20

17

20

18

PublicPrivate Housing

Private

Private ExcludingHousing

Total

MarchFebruary


-5.0

-4.0

-3.0

-2.0

-1.0

0.0

1.0

20

12

20

13

20

14

20

15

20

16

20

17

20

18

15

In Q1 2018 exports maintained a high dynamism.

Manufacturing Exports Index 2013 = 100, s. a.

Trade BalanceUSD millions

Current Account% of GDP

s. a. / Seasonally adjusted data.Source: Banco de México with data from SAT, SE, Banco de México, INEGI.Merchandise Trade Balance. SNIEG. Information of National Interest.

Source: SAT, SE, Banco de México, INEGI. Merchandise Trade Balance.SNIEG. Information of National Interest.

Note: Blue bars with a darker tone refer to the first quarter of each year.Source: Banco de México and INEGI.

80

90

100

110

120

130

140

150

160

20

12

20

13

20

14

20

15

20

16

20

17

20

18

-10,000

-8,000

-6,000

-4,000

-2,000

0

2,000

4,000

6,000

8,000

20

07

20

08

20

09

20

10

20

11

20

12

20

13

20

14

20

15

20

16

20

17

20

18

Q1-2018

Moving Average (4 Quarters)

Current Account

Total

Automotive

Non-automotive

April Q1-2018

Non-oil

Oil

Total

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

-12

-10

-8

-6

-4

-2

0

2

4

6

8

20

06

20

07

20

08

20

09

20

10

20

11

20

12

20

13

20

14

20

15

20

16

20

17

20

18

Measures of Slack: Principal Component by Frequency of Indicators 2/

%

16

As for the economy’s cyclical position, different indicators signal that slack conditions remained tight in early2018.

-6

-4

-2

0

2

4

6

20

07

20

08

20

09

20

10

20

11

20

12

20

13

20

14

20

15

20

16

20

17

20

18

-6

-4

-2

0

2

4

6

20

07

20

08

20

09

20

10

20

11

20

12

20

13

20

14

20

15

20

16

20

17

Output Gap 1/

% of potential output, s. a. Monthly Quarterly

Note: Confidence interval of the output gap calculated with an unobservedcomponents method. The dotted line refers to the confidence interval for the gapcalculated without the oil sector while the blue area is the interval corresponding tothe total GDP.s. a. / Estimated with seasonally adjusted data.1/ Estimated using the Hodrick-Prescott (HP) filter with tail correction; see Banco deMéxico Inflation Report, April- June 2009, p.69.Source: Estimated by Banco de México with data from INEGI and Banco de México.

2/ Indices constructed based on the Model Confidence Set (MCS) methodology; see Banco de México Inflation Report, October – December 2017, Box 3. Monthly and quarterlyslack indices are based on the first principal component of sets that include 11 and 12 indicators, respectively. The first component represents 51% and 58% of joint variation of themonthly and quarterly indicators, respectively. Gray lines correspond to individual slack indicators used in the analysis of Principal Components.Source: Own elaboration with data from INEGI and Banco de México.

GDP

GDP Excluding theOil Sector

Q1-2018

Q4-2017February


-4

-3

-2

-1

0

1

2

3

4

5

6

20

12

20

13

20

14

20

15

20

16

20

17

20

18

17

In particular, slack conditions in the labor market remained tight.

-2.0

-1.5

-1.0

-0.5

0.0

0.5

1.0

1.5

2.0

2.5

20

03

20

05

20

07

20

09

20

11

20

13

20

15

20

17

-3

-2

-1

0

1

2

3

4

20

03

20

05

20

07

20

09

20

11

20

13

20

15

20

17

Unemployment Rate Unemployment Rate andInformal Salaried Workers

Average Wage of Salaried Workers according to the National Employment Survey (ENOE) 1/

Annual % change

s. a. /Seasonally adjusted data.Note: Shadow represent confidence bands. The interval corresponds to two average standard deviations among all estimates.Source: Banco de México with data from INEGI (ENOE).

1/To calculate average nominal wages, the bottom 1 percent and the top 1percent in the wage distribution were excluded. Individuals with zeroreported income or those who did not report it are excluded.Source: Calculated by Banco de México with data from INEGI (ENOE).

Labor Market GapPercentage points, s. a.

April March Q1-2018


20

18

20

18

Nominal

Real

-4

0

4

8

12

-12

-8

-4

0

4

8

12

Mar

-13

Jun

-13

Sep

-13

Dec

-13

Mar

-14

Jun

-14

Sep

-14

Dec

-14

Mar

-15

Jun

-15

Sep

-15

Dec

-15

Mar

-16

Jun

-16

Sep

-16

Dec

-16

Mar

-17

Jun

-17

Sep

-17

Dec

-17

Mar

-18


Sources of the economy’s financial resources continued growing at relatively low rates, but higher than those of2017. This is attributed to the increase in domestic sources which has offset tighter external financing in Mexicosince late 2014.

Real annual % changea) Sources

Annual flows as % of GDP

Note: Figures expressed in percent of the nominal average annual GDP.1/ Corresponds to the domestic financial assets aggregate F1, which includes the monetary aggregate M3 plus other instruments held by residentsectors that hold money that are not considered in the monetary aggregates.2/ Includes the monetary instruments held by non-residents (equivalent to the difference between M4 and M3) and other non-monetary externalsources (the external debt of the Federal Government, the external debt of public agencies and companies, the external liabilities of commercialbanks, external financing to the non-financial private sector, the raising of agencies, among others).3/ Includes the financial intermediaries credit, of the National Housing Fund (Infonavit) and Fovissste, the issuance of domestic debt and externalfinancing of firms.4/ It includes capital accounts, and results and other assets and liabilities of commercial and development banks, non-bank financial intermediaries,of the National Housing Fund (Infonavit) and Banco de México –including the securities issued by this Central Institute for the purposes of monetaryregulation, especially those related to neutralizing the monetary impact by the operational surplus–. Similarly, it includes non-monetary liabilitiesfrom the Institute for the Protection of Bank Savings (IPAB), as well as the effect of the change in the valuation of public debt instruments, amongother concepts.Source: Banco de México.

Sources and Uses of Financial Resources

b) Uses

Note: Definitions of each item are presented in the box on the left. Gray shadows divide even years from odd ones.p/ Preliminary data.

Domestic Sources

External Sources

International Reserves

Private Sector Financing

Public Sector Financing Q1-2018 /p

2013 2014 2015 2016 2017 Q1-2018

Total sources 10.0 9.7 5.8 7.4 7.9 7.4

Domestic sources 1/ 5.7 5.6 4.6 5.5 6.6 6.4

External sources 2/ 4.2 4.1 1.2 1.9 1.3 1.0

Total uses 10.0 9.7 5.8 7.4 7.9 7.4International reserves 1.0 1.3 -1.5 0.0 -0.4 -0.2Public sector financing 4.1 4.7 4.2 2.9 1.1 2.6

Private sector financing 3/ 4.2 2.6 3.1 3.0 3.9 3.9

Domestic 2.5 1.7 3.0 3.0 3.3 3.3External 1.7 0.8 0.1 0.0 0.6 0.5

Other concepts 4/ 0.7 1.2 0.1 1.6 3.2 1.0

-9

-6

-3

0

3

6

9

12

15

Mar

-13

Sep

-13

Mar

-14

Sep

-14

Mar

-15

Sep

-15

Mar

-16

Sep

-16

Mar

-17

Sep

-17

Mar

-18

0

5

10

15

20

Dec

-13

Jun

-14

Dec

-14

Jun

-15

Dec

-15

Jun

-16

Dec

-16

Jun

-17

Dec

-17

19

Domestic financing to firms has accelerated, as there has been some substitution of foreign liabilities by domesticones. Credit to households grew at a moderate rate, although higher than in Q4 2017, which could be associatedwith the recovery of the economic activity and the real wage bill.

Total 1/ Domestic 3/

1/ Data adjusted due to exchange rate variations.2/ Data adjusted due to the withdrawal from and the incorporation of some financial intermediaries to thecredit statistics. Includes credit from commercial and development banks, as well as other non-bankfinancial intermediaries.Source: Banco de México.

3/ Data adjusted due to the withdrawal from and the incorporation of some financial intermediaries to thecredit statistics.4/ Data adjusted due to exchange rate variations.Source: Banco de México.


March

Firms 4/

Housing

Consumption

Total

External

Domestic 2/

Q1-2018

Total Financing to the Non-Financial Private SectorReal annual % change

Delinquency Rates%


Housing

20

Firms 1/ Consumption 3/

Note: The delinquency rate is defined as the stock of non-performing loans divided by the stock of total loans.1/ It refers to non-financial private firms.2/ The adjusted delinquency rate is defined as the non-performing portfolio plus debt write-offs accumulated over the last 12 months divided by the total portfolio plus debt write-offs accumulated over the last 12 months.3/ It includes the Sofomes ER subsidiaries of bank institutions and financial groups.4/ It includes auto loans and credit for acquisition of other movable properties.Source: Banco de México.

During Q1 2018, the delinquency rates of credit to firms and housing have stabilized. In contrast, thedelinquency rates of consumer credit presents an upward trend since October 2017.

0

2

4

6

8

20

13

20

14

20

15

20

16

20

17

20

18

March

Adjusted: Commercial Banks 2/

Commercial Banks

Development Banks

0

2

4

6

8

10

12

20

13

20

14

20

15

20

16

20

17

20

18

March

National Housing Fund

Commercial Banks

Adjusted: Commercial Banks 2/

0

2

4

6

8

10

12

14

16

18

20

13

20

14

20

15

20

16

20

17

20

18

March

Adjusted: Total 2/

Credit Cards

Total

Acquisition of Consumer Durables 4/

Personal

Payroll


Outline




Inflation3

Monetary Policy4

0

1

2

3

4

5

6

7

8

9

10

11

12

13

20

11

20

12

20

13

20

14

20

15

20

16

20

17

20

18


During the first months of 2018, annual headline inflation exhibited a clear reduction, consistent with theforecast presented in the Oct–Dec 2017 Quarterly Report. This has been the result of the adopted monetarypolicy actions and the fading of shocks derived from last year increases in energy prices.

Consumer Price IndexAnnual % change

Source: Banco de México and INEGI.

1F-May

Headline

Core

Variability Interval

Non-core

6.79

4.46

3.69

23

Core inflation and, in particular, the annual growth rate of merchandise prices presented a clear downwardtrend during the year. The growth rates of services prices have also declined. Meanwhile, the fundamentalcore inflation trajectory is consistent with the consolidation of a downward trend in inflation.

-3

-1

1

3

5

7

9

20

10

20

11

20

12

20

13

20

14

20

15

20

16

20

17

20

18

-3

-1

1

3

5

7

9

20

10

20

11

20

12

20

13

20

14

20

15

20

16

20

17

20

18

Merchandise Services



Merchandise

Food, Beverages and Tobacco

Non-food Merchandise Housing

Services

Other Services

Education

Core Price IndexAnnual % change

1F-May1F-May


Core Inflation and Fundamental Core Inflation

Annual % change

0

1

2

3

4

5

6

7

8

20

07

20

08

20

09

20

10

20

11

20

12

20

13

20

14

20

15

20

16

20

17

20

18

Core

Fundamental Core

1F-May


-120

-60

0

60

120

180

240

300

-20

-10

0

10

20

30

40

50

20

10

20

11

20

12

20

13

20

14

20

15

20

16

20

17

-25

-20

-15

-10

-5

0

5

10

15

20

25

30

35

40

45

20

10

20

11

20

12

20

13

20

14

20

15

20

16

20

17

20

18


Non-core Selected Fruits and Vegetables

Source: Banco de México and INEGI. Source: Banco de México and INEGI.

LP Gas

Natural Gas

Gasoline

Energy

1F-May

Fruits and Vegetables

Squash

Avocado

Tomato

Selected Energy Products


-12

-8

-4

0

4

8

12

16

20

20

10

20

11

20

12

20

13

20

14

20

15

20

16

20

17

20

18

Non-core

Agriculture

Energy and Government Approved Fares

1F-May 1F-May

Annual non-core inflation decreased between Q4 2017 and Q1 2018. Lower growth rates of energy and fruitsand vegetables prices were noteworthy.

Non-core Price IndexAnnual % change

-10

-5

0

5

10

15

20

25

30

35

40

45

-0.6

-0.4

-0.2

0.0

0.2

0.4

0.6

0.8

1.0

20

15

20

16

20

17

20

18


3.0

73

.00

3.1

43

.06

2.8

82

.87

2.7

42

.59

2.5

22

.48

2.2

12

.13

2.6

12

.87

2.6

02

.54

2.6

02

.54

2.6

52

.73

2.9

73

.06 3.3

0 3.3

64

.72 4.8

6 5.3

5 5.8

2 6.1

66

.31

6.4

46

.66

6.3

56

.37 6.6

36

.77

5.5

55

.34

5.0

44

.55

4.4

6

-1

0

1

2

3

4

5

6

7

8

20

15

20

16

20

17

20

18

Consumer Price Index (CPI)Incidences in percentage points

Selected Components of CPIAnnual % change and incidences in percentage points


1F-May

Core Inflation

Non-core Inflation

Government Approved Fares

Headline

Core

Livestock

Fruits and Vegetables

Energy

Gasoline L.P. Gas

Fruits and VegetablesMerchandise

Incidences of merchandise and services, as well as of non-core inflation on annual headline inflation havedeclined throughout the year.

-11.20

-10

-5

0

5

10

15

20

25

30

-0.5

0.0

0.5

1.0

1.5

2.0

20

15

20

16

20

17

20

18

-10

-5

0

5

10

15

20

25

30

35

40

45

-0.5

0.0

0.5

1.0

20

15

20

16

20

17

20

18

1

2

3

4

5

6

7

-0.5

0.0

0.5

1.0

1.5

2.0

2.5

20

15

20

16

20

17

20

18

1F-May 1F-May

1F-May 1F-May

Incidences (Bars)

Annual % Change (Line)

Incidences (Bars)


Incidences (Bars)


Incidences (Bars)



Outline




Inflation3

Monetary Policy4


To guide its monetary policy actions, Banco de México’s Governing Board closely followsthe development of inflation vis-à-vis its anticipated trajectory, taking into account themonetary policy stance adopted and the horizon in which monetary policy operates, aswell as available information on all inflation determinants and on medium- and long-terminflation expectations, including the balance of risks to such factors.

In particular, the Governing Board will maintain a prudent monetary policy stance andwill continue following closely:

The potential pass-through of exchange rate fluctuations on prices.

The monetary policy stance of Mexico relative to that of the U.S.

The evolution of slack conditions in the Mexican economy.

In the presence of factors that may involve risks to both inflation and inflationexpectations, if necessary, monetary policy will act in a timely and firm manner.

Monetary Policy Stance

-2

-1

0

1

2

3

4

5

6

20

09

20

10

20

11

20

12

20

13

20

14

20

15

20

16

20

17

20

18

Monetary Policy Rate and Consumer Price Index% and annual % change

Short-Term Ex-Ante Real Rate and Estimated Range for the Short-Term Neutral Real Rate in the Long-Term 1/

%

Source: Banco de México and INEGI. 1/ The short-term ex-ante real rate is constructed using the Target for the Overnight Interbank Interest Rateand 12-month inflation expectations from Banco de México Survey. The dotted line corresponds to themidpoint of the range. For this Report, the estimate was updated to include data until December 2017.Source: Banco de México.

2

3

4

5

6

7

8

9

20

09

20

10

20

11

20

12

20

13

20

14

20

15

20

16

20

17

20

18

Target for the OvernightInterbank Interest Rate

May

Headline Inflation

Core Inflation

1F-May

Inflation Target

May


With these actions, the overnight interbank interest rate is at 7.50%. Consequently, the real ex-ante interestrate has reached a level close to 3.50%.

Short-Term Ex-Ante Real Rate

Short-Term Neutral Real RateRange in the Long-Term

2.0

2.5

3.0

3.5

4.0

4.5

5.0

5.5

6.0

6.5

7.0

20

05

20

08

20

11

20

14

20

17

1.5

2.0

2.5

3.0

3.5

4.0

4.5

Jan

-14

Ap

r-1

4Ju

l-1

4O

ct-1

4Ja

n-1

5A

pr-

15

Jul-

15

Oct

-15

Jan

-16

Ap

r-1

6Ju

l-1

6O

ct-1

6Ja

n-1

7A

pr-

17

Jul-

17

Oct

-17

Jan

-18

Ap

r-1

8

2.5

3.0

3.5

4.0

4.5

Jan

-16

Mar

-16

May

-16

Jul-

16

Sep

-16

No

v-1

6

Jan

-17

Mar

-17

May

-17

Jul-

17

Sep

-17

No

v-1

7

Jan

-18

Mar

-18

Headline and Core Long-term

Source: Banco de México Survey (monthly periodicity).

2018

2019

Next 5-8 Years

Next 4 Years

Market Instruments 1/

Inflation Target

Citibanamex Next 3-8 Years

Inflation ExpectationsMedian, %

AprilAprilMay

29

After the additional shocks to inflation in late 2017, between December and February inflation expectations forthe end of the year were adjusted upwards. However, the median of analysts’ inflation expectations declineddue to the lower-than-expected observed inflation from February to April. The medians for medium- and long-term inflation expectations remained stable at 3.50%.

1/ For a description of the estimation of log-term inflation expectations, see the Box“Decomposition of Break-even Inflation” in the Quarterly Report, October –December 2013. The estimate was updated by including data as of November 2017.Source: Banco de México Survey (monthly periodicity) and Citibanamex Survey(biweekly periodicity).

Source: Estimated by Banco de México with data from Valmer and Bloomberg.

Break-even Inflation and InflationRisk Implicit in Bonds

%HeadlineCore

20-day Moving Average

10-year Bond Break-even Inflation

May



16

17

18

19

20

21

22

23

24

Jan

-16

Mar

-16

May

-16

Jul-

16

Sep

-16

No

v-1

6

Jan

-17

Mar

-17

May

-17

Jul-

17

Sep

-17

No

v-1

7

Jan

-18

Mar

-18

May

-18

Nominal Exchange Rate 1/

Pesos per USD

8

9

10

11

12

13

14

15

16

17

Sep

-17

Oct

-17

No

v-1

7

Dec

-17

Jan

-18

Feb

-18

Mar

-18

Ap

r-1

8

May

-18

Implied Volatility in FX Options %

1/ Observed exchange rate refers to the daily FIX Exchange Rate. Numbers in front of expectationscorrespond to the averages of the Banco de México survey for April and the Citibanamex survey for May22th, 2018.Source: Banco de México.

Source: Bloomberg.

Exchange Rate (as of May 29th) 19.75

Depreciation

May May

From January to mid-April, the Mexican peso appreciated against the U.S. dollar. However, since mid-April ithas registered higher volatility and an important depreciation as a result of higher interest rates in the U.S., thegeneralized strengthening of the U.S. dollar and some domestic factors, such as the uncertainty over NAFTAand Mexico’s elections.

1 Month

1 Week

18 Months

9 Months

6 Months

Analysts’ Expectation 2018 Banxico 18.83

Analysts’ Expectation 2019 Citibanamex 18.62

Analysts’ Expectation 2018 Citibanamex 18.98

Analysts’ Expectation 2019 Banxico 18.56


2

3

4

5

6

7

8

9

No

v-1

5

Jan

-16

Mar

-16

May

-16

Jul-

16

Sep

-16

No

v-1

6

Jan

-17

Mar

-17

May

-17

Jul-

17

Sep

-17

No

v-1

7

Jan

-18

Mar

-18

May

-18

Interest Rates %

Source: Banco de México and Proveedor Integral de Precios (PiP).

May

Source: Banco de México and Proveedor Integral de Precios (PiP).

1 Day

3 Month

2 Year

1 Year

10 Year

Yield Curve%

2.0

2.5

3.0

3.5

4.0

4.5

5.0

5.5

6.0

6.5

7.0

7.5

8.0

8.5

9.0

1 1 3 6 1 2 3 5 10 20 30

Months YearsDay

Dec 01, 2015

Sep 29, 2017

May 29, 2018

Jun 30, 2017

Dec 29, 2017

Short-term interest rates increased in line with the rise in the overnight interbank interest rate. Althoughmedium- and long-term interest rates closed the period at levels similar to those registered at the end of 2017,they declined from the beginning of the year to mid-April, and increased later.

32

2.5

3.0

3.5

4.0

4.5

5.0

5.5

6.0

6.5

1 1 3 6 1 2 3 5 10 20 30

Mexico and United States Interest RateSpreads Curve 1/

Percentage points

Volatility-adjusted 3-month Interest RateSpread for Selected Emerging Countries 2/

Index

Government Securities’ Holdings byForeign Investors

MXN billion

2/ The selected countries are Brazil, Chile, Colombia, Turkey, South Africa, SouthKorea and Poland.Source: Bloomberg.

3/ The total includes CETES, bonds, udibonos, bondes and bondes D.Source: Banco de México.

0

400

800

1,200

1,600

2,000

2,400

20

14

20

15

20

16

20

17

20

18

Bonds

CETES

Total 3/May

-0.2

-0.1

0.0

0.1

0.2

0.3

0.4

0.5

0.6

0.7

0.8

0.9

1.0

1.1

Au

g-1

6

Oct

-16

Dec

-16

Feb

-17

Ap

r-1

7

Jun

-17

Au

g-1

7

Oct

-17

Dec

-17

Feb

-18

Ap

r-1

8

RangeEmerging Economies’ AverageMexico

May

1/ The United States objective rate is the average of the interval considered by the FederalReserve.Source: Proveedor Integral de Precios (PiP) and U.S. Treasury Department.

Dec 01, 2015

Sep 29, 2017

May 29, 2018

Jun 30, 2017

Dec 29, 2017

Months YearsDay

Interest rate spreads between Mexico and the U.S. have remained at high levels, especially shorter-termones. However, considerable increases along the U.S. yield curve led to a decline in such spreads during theperiod covered in this Report.



Outline




Inflation3

Monetary Policy4

-1

0

1

2

3

4

5

6

-1

0

1

2

3

4

5

6

Q2 Q4 Q2 Q4 Q2 Q4 Q2 Q4 Q2 Q4 Q2 Q4 Q2 Q4

Observed

Central Scenario Previous Report

Central Scenario Current Report


Fan Chart: GDP GrowthAnnual percent, s. a.

s. a. / Seasonally adjusted data.Source: INEGI and Banco de México.

Economic Activity Outlook

2013 2014 2015 2016 2017 2018 2019

Increase in the Number of IMSS-insured Jobs

(Thousands)

Report Oct-Dec 2017 Jan-Mar 2018

2018 680 – 780 680 – 780

2019 690 – 790 690 – 790

GDP Growth

(%)


2018 2.0 – 3.0 2.0 – 3.0

2019 2.2 – 3.2 2.2 – 3.2

Current Account Deficit

(% of GDP)


2018 2.1 2.1

2019 2.3 2.3

2018Q4

2019Q4


Risks to Growth OutlookBalance of risks to growth remains biased to the downside.

That the uncertainty over NAFTA and the electoral process causes a delay in private investment plans ora reduction in consumers’ spending.

That bouts of volatility in international financial markets are observed.

That NAFTA renegotiation is not favorable for the Mexican productive sector, or that it leads to itscancellation.

That protectionist measures are escalated worldwide.

That competitiveness of the Mexican economy is affected by a number of external and domestic factors.

That the uncertainty over NAFTA renegotiations is resolved, allowing investment to have a sustainedrecovery.

Downward:

Upward:

Fore

cast

Ho

rizo

nM

ed

ium

-an

d

Lon

g-Te

rm

-3

-2

-1

0

1

2

3

-3

-2

-1

0

1

2

3

Q22013

Q4 Q22014

Q4 Q22015

Q4 Q22016

Q4 Q22017

Q4 Q22018

Q4 Q22019

Q4

Forecasts

-6

-5

-4

-3

-2

-1

0

1

2

3

4

5

6

-6

-5

-4

-3

-2

-1

0

1

2

3

4

5

6

Q2 Q4 Q2 Q4 Q2 Q4 Q2 Q4 Q2 Q4 Q2 Q4 Q2 Q4

Observed



Given that the economic activity forecast considers growth close to its potential, and with a balance of risksbiased to the downside, the tight conditions of the economy are expected to relax throughout the forecasthorizon. Therefore, in this horizon, no additional tightening is expected to affect inflation significantly.

Output Gap Estimate% of potential output, s. a.

s. a. / Elaborated with seasonally adjusted data.Source: Banco de México.

Note: The dynamics expected for this indicator is consistent with the forecasts forthe output that excludes the oil sector. It is not feasible to calculate a fan chart forbecause of the nature with which the forecast was constructed.Source: Banco de México.

2013 2014 2015 2016 2017 2018 2019

2018Q4

2019Q4

2017Q4

Output Gap Estimate Excluding the Oil Sector% of potential output, s. a.

Quarterly Slack Index

-6

-5

-4

-3

-2

-1

0

1

2

3

4

5

6

-6

-5

-4

-3

-2

-1

0

1

2

3

4

5

6

Q2 Q4 Q2 Q4 Q2 Q4 Q2 Q4 Q2 Q4 Q2 Q4 Q2 Q4

Observed



2013 2014 2015 2016 2017 2018 2019s. a. / Elaborated with seasonally adjusted data.Source: Banco de México.

Fan Charts

2018Q4

2019Q4

Central Scenario for Inflation

Core Inflation


These forecasts consider:

An orderly performance of the exchange rate.

Absence of labor market-related pressures.

That non-core inflation keeps declining in the remainder of 2018 at the expected rate.

Headline Inflation

• Annual headline inflation is expected to continue declining, approaching its 3.0% targetthroughout the year, and remaining at levels close to the target in 2019.

• Annual core inflation is estimated to continue decreasing gradually to consolidate itsconvergence to the 3.0% target during 2019.

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

4.5

5.0

5.5

6.0

6.5

7.0

7.5

8.0

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

4.5

5.0

5.5

6.0

6.5

7.0

7.5

8.0

Q2 Q4 Q2 Q4 Q2 Q4 Q2 Q4 Q2 Q4 Q2 Q4 Q2 Q4

Observed Inflation



Headline Inflation Target

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

4.5

5.0

5.5

6.0

6.5

7.0

7.5

8.0

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

4.5

5.0

5.5

6.0

6.5

7.0

7.5

8.0

Q2 Q4 Q2 Q4 Q2 Q4 Q2 Q4 Q2 Q4 Q2 Q4 Q2 Q4

Observed Inflation



Headline Inflation Target


Annual Headline Inflation 1/

%Annual Core Inflation 1/

%

1/ Quarterly average of annual inflation. The next four and six quarters are indicated as of the second quarter of 2018, that is, the second and fourth quarters of 2019, periods in which the monetary policy transmission channels fully operate.*/ Observed.Source: Banco de México and INEGI.

Based on the available information and considering the current monetary stance, in the horizon in whichmonetary policy operates, inflation performance is estimated to remain similar to that published in theprevious Report.

4QR

6QR

Next

2013 2014 2015 2016 2017 2018 2019

4QR

6QR

Next

Fan Charts

2013 2014 2015 2016 2017 2018 2019

2020

Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1

Current 5.3* 4.6 4.3 3.8 3.3 3.1 3.1 3.1 3.1

Previous 5.5 4.8 4.3 3.8 3.2 3.0 3.1 3.2 --

2018 2019 2020

Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1

Current 4.3* 3.7 3.6 3.4 3.2 3.2 3.1 3.0 3.0

Previous 4.4 4.0 3.8 3.6 3.3 3.2 3.1 3.0 --

2018 2019

Upward:

That the national currency continues to be under pressure due to an environment of higher external interest rates andthe U.S. dollar’s strength, as well as uncertainty associated with both the NAFTA renegotiation and Mexico’s elections.

That shocks in agricultural product prices and upward pressures in the prices of certain energy goods are observed.

Risks to Inflation OutlookThe balance of risks for inflation relative to its expected path remains biased upwards associated with diverse

risks, amid a highly uncertain environment.


Given the economy’s cyclical conditions, unit labor costs could lead to upward inflationary pressures.

In the presence of factors that, by their nature, may involve risks to both inflation and inflation expectations, if necessarymonetary policy will act in a timely and firm manner to attain the convergence of inflation to its 3% target and tostrengthen the anchoring of medium- and long-term inflation expectations to reach the target.

Downward:

A possible appreciation of the peso if NAFTA negotiations are favorable.


Adjustments to Banco de México’s Communication Strategy It is relevant to stress that transparency regarding Banco de México’s actions is key to generate

confidence and credibility on its actions to comply with its constitutional mandate of procuring pricestability.

The Governing Board announced a number of adjustments to its communication strategy:

The Minutes of the Monetary Policy Decisions will include the voters’ identity and, in case of dissent duringvote, it will have an explanation of the reasons behind it.

The transcripts of the meetings in which monetary policy decisions are made will be released to the publicthree years after the respective meeting (a shorter period as compared to other central banks).

The Press Release of the Announcement of the Monetary Policy Decision and the Minutes will be published inSpanish and English simultaneously on the corresponding dates.

Speeches and public presentations given by the Governing Board members will be published on Banco deMéxico’s web page.

These adjustments will contribute to greater transparency and accountability among the GoverningBoard members, with regard to both the collegial body and individually.

In addition, it is worth noting that the Governing Board recently published the "Policies for the PublicConsultation of the General Provisions Issued by Banco de México" that establish additionalcommunication channels with citizens.


Final Remarks

The strengthening of the Mexican macroeconomic framework (monetary and fiscalstance, and resilience of the financial system) has placed the country in a better positionto face a complex outlook, while considerable risks in the short and medium terms persist.However, to take on the possible challenges and to increase the economy’s ability to faceadverse shocks, it is key for Mexico to strengthen further its macroeconomic stance.

Similarly, steps should be implemented to improve competitiveness across the countryand to foster greater productivity of the economy.

In addition, it is important to implement profound reforms and actions that would allowto have better public safety conditions, legal certainty and economic competition, whichwould grant favorable conditions to investment and growth, in an environment of low andstable inflation for the benefit of the Mexican population.


Annex – Boxes

The Phillips Curve in the Center of Global Debate.

Impact of International Price Dynamics on the Volume of Agricultural GoodsExports.

Information on Attacks on Users of Interbank Electronic Payment System (SPEI).

1

3

6

Recent Evolution of Spending on Gross Fixed Investment in Mexico.

Alternative Measures of Labor Underutilization.

Interbank Electronic Payment System (SPEI).

Recent Evolution of Financial Markets in Mexico.

2

4

7

5

Improvements in the Communication Strategy, Transparency and Accountability ofBanco de México.

8


Annex – Boxes

Information on Attacks on Users of Interbank Electronic Payments System (SPEI).6

Interbank Electronic Payments System (SPEI).5

1. What is SPEI?

2. How does SPEI work?

3. Use of SPEI

1. Introduction

2. Summary of the Log of Operational Events in April and May

3. Response Protocol to Cybersecurity Incidents

4. Cybersecurity Requirements Applicable to Users

5. Communication with Participants and the Public

Communication with Participants Communication with the Public

6. Risk Mitigation

Technological Actions Operational Actions Regulatory Actions

Documents

Presentación de PowerPoint · Central banks of developed economies have adjusted their monetary policy stance at different paces, according to each country’scyclical position and