Post on 06-Feb-2017
transcript
Monetary Policy Outlook for Mexico
J.P. Morgan Investor SeminarWashington, DC, 8 October 2016
Mr. Javier Guzmán Calafell, Deputy Governor, Banco de México
Outline
2Monetary Policy Outlook for Mexico
Macroeconomic Policy Response4
Evolution of the Mexican Economy2
Final Remarks5
Monetary Policy in Mexico1
Inflation and its Determinants3
3
Monetary policy in Mexico is implemented at present in a complex environment:
A negative output gap, with forecasts suggesting that it will remain in negativeterritory through end-2017.
A rate of inflation that has remained under the 3 percent target for 17 months.
On the other hand, an important depreciation of the peso, with potential inflationaryconsequences.
Monetary Policy Outlook for Mexico
4
This was reflected in the dispersion of analysts’ expectations on the reference rate priorto the last monetary policy decision.
Monetary Policy Outlook for Mexico
Mexico: Analysts’ Expectations for Next Monetary Policy Rate Adjustment1/
Basis points
1/ As of 26 September 2016.Source: Banco de México, Banamex, Reuters and analysts’ reports.
September November December2016 Monetary Policy Meetings
0
25
50
75
Outline
5Monetary Policy Outlook for Mexico
Macroeconomic Policy Response4
Evolution of the Mexican Economy2
Final Remarks5
Monetary Policy in Mexico1
Inflation and its Determinants3
6
The pace of economic activity moderated significantly during the second quarter of 2016,affected in part by factors of a transitory nature.
s.a./ Seasonally adjusted.Source: INEGI.
Monetary Policy Outlook for Mexico
Mexico: Gross Domestic ProductAnnual %, s.a.
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
2014 2015 2016
2Q
7
The most recent information points to an upturn of economic activity in the third quarter,although with signs of deceleration. Services have continued to provide the main stimuluson the supply side, but trend growth in this sector seems to be slowing.
Monetary Policy Outlook for Mexico
Mexico: IGAE 1/
Index 2008 = 100, s.a.
1/ Monthly GDP proxy.s.a./ Seasonally adjusted.Source: INEGI.
90
95
100
105
110
115
120
125
2008 2009 2010 2011 2012 2013 2014 2015 2016
Total Industry Services
July
Monetary Policy Outlook for Mexico 8
Private ConsumptionIndex 2008 = 100, s. a.
Gross Fixed InvestmentIndex 2008 = 100, s. a.
s. a./ Seasonally adjusted.Source: INEGI and ANTAD.
s. a./ Seasonally adjusted.Source: INEGI.
On the demand side, economic activity has been supported mainly by private consumption,which also shows indications of losing speed. Investment has remained weak.
70
80
90
100
110
120
130
140
150
20
08
20
09
20
10
20
11
20
12
20
13
20
14
20
15
20
16
Total
Construction
Machinery and Equipment
July80
90
100
110
120
130
140
150
20
08
20
09
20
10
20
11
20
12
20
13
20
14
20
15
20
16
Private Consumption in the Domestic Market
Total ANTAD Sales
JulyAugust
Monetary Policy Outlook for Mexico 9
Mexican Non-Oil Exports and US Industrial ProductionIndex 2008 = 100, s. a.
s. a./ Seasonally adjusted.Source: SAT, Secretaría de Economía, Banco de México, INEGI, Blue Chip and Federal Reserve.
The downward trend in manufacturing exports seems to have stopped, but they remainsluggish. The expected recovery of industrial output in the United States would stimulateexternal sales.
ExportsIndex 2008 = 100 1/
1/ Trend data.Source: SAT, Secretaría de Economía, Banco de México and INEGI.
70
85
100
115
130
145
160
20
09
20
10
20
11
20
12
20
13
20
14
20
15
20
16
Total
Non-Oil
Manufactures
August100
101
102
103
104
105
106
107
135
140
145
150
155
160
165
170
20
14
20
15
20
16
20
17
<- Mexican Non-Oil Exports
US Industrial Production ->
August
Forecast
10
Labor market indicators send mixed signals, but in general they are consistent with a gradualdeceleration of economic activity.
Mexico
Monetary Policy Outlook for Mexico
Unemployment Rate and Employed Population% (s.a.) and million workers
Source: INEGI.
Nominal Wages 1/
Annual % change
1/ Daily average for all IMSS-affiliated workers.Source: IMSS.
0
1
2
3
4
5
6
20
08
20
09
20
10
20
11
20
12
20
13
20
14
20
15
20
16
2Q
35
38
41
44
47
50
53
56
3.5
4.0
4.5
5.0
5.5
6.0
6.5
7.0
2011 2012 2013 2014 2015 2016
<- Unemployment Rate Employed Population ->
2QAugust
-7
-6
-5
-4
-3
-2
-1
0
1
2
3
4
5
6
7
-7
-6
-5
-4
-3
-2
-1
0
1
2
3
4
5
6
7
Q2 Q4 Q2 Q4 Q2 Q4 Q2 Q4 Q2 Q4 Q2 Q4 Q2 Q4 Q2 Q4 Q2 Q4 Q2 Q4
11
In this context, the output gap is projected to remain negative through end-2017.
Monetary Policy Outlook for Mexico
Output Gap Estimates and Projections% of potential, s.a.
s.a./ Seasonally adjusted.Source: Banco de México.
2015Q4
2016 Q4
2017Q4
2008 2009 2010 2011 2012 2013 2014 2015 2016 2017
12
GDP growth in Mexico has been restrained by the evolution of economic activity in the US.Yet, Mexico’s economy has shown resilience to this shock...
s.a./ Seasonally adjusted.Source: Bureau of Economic Analysis and Federal Reserve.
Monetary Policy Outlook for Mexico
US: GDP, Industrial and Manufacturing ProductionAnnual %, s.a.
Mexican GDP vs. US GDP, IP and Manufacturing ProductionIndex 2013-Q4 = 100, s.a.
s.a./ Seasonally adjusted.Source: INEGI, Bureau of Economic Analysis and Federal Reserve.
-2
-1
0
1
2
3
4
Jan
-14
Ap
r-1
4
Jul-
14
Oct
-14
Jan
-15
Ap
r-1
5
Jul-
15
Oct
-15
Jan
-16
Ap
r-1
6
Gross Domestic Product
Industrial Production
Manufacturing Production 2Q99
100
101
102
103
104
105
106
Oct
-13
Jan
-14
Ap
r-1
4
Jul-
14
Oct
-14
Jan
-15
Ap
r-1
5
Jul-
15
Oct
-15
Jan
-16
Ap
r-1
6
MX GDP
US GDP
US IP
US Manuf.
2Q
13
…with structural reform efforts as an important explanatory factor.
Source: World Economic Forum.
Monetary Policy Outlook for Mexico
Emerging Market Economies: Change in GlobalCompetitiveness Index Score between 2015 and 2016
Points
Mexico: Global Competitiveness IndexScore (1-7 scale) and Ranking
Source: World Economic Forum.
-0.10
-0.05
0.00
0.05
0.10
0.15
0.20
0.25
Mal
aysi
a
Hu
nga
ry
Bra
zil
Ind
on
esia
Thai
lan
d
Co
lom
bia
Turk
ey
Per
u
Ko
rea
Sin
gap
ore
Ch
ile
Ch
ina
Po
lan
d
Ru
ssia
S. A
fric
a
Mex
ico
Ind
ia 4.0
4.1
4.2
4.3
4.4
4.5
Average 2006-2015 2016
<- Score
50
52
54
56
58
60
Average 2006-2015 2016
Ranking ->
Outline
14Monetary Policy Outlook for Mexico
Macroeconomic Policy Response4
Evolution of the Mexican Economy2
Final Remarks5
Monetary Policy in Mexico1
Inflation and its Determinants3
15
Headline CPI Inflation%
Source: Banco de México and INEGI.
Monetary Policy Outlook for Mexico
Inflation has displayed a favorable behavior, and currently stands at 2.97 percent, slightlybelow the 3 percent target.
0
1
2
3
4
5
6
2010 2011 2012 2013 2014 2015 2016
September
Variability Interval
16
CPI Inflation: Core vs. Non-Core%
Monetary Policy Outlook for Mexico
The core and more recently the non-core components show an upward trend, but theyremain at moderate levels.
Source: Banco de México and INEGI.
0
1
2
3
4
5
6
7
8
9
10
11
2010 2011 2012 2013 2014 2015 2016
Core Non-Core
Variability Interval
September
17
Core CPI Inflation: Merchandise and Services%
Monetary Policy Outlook for Mexico
So far, the pass-through from the exchange rate depreciation has been concentrated onthe prices of merchandise, which have increased relative to those of services.
Source: Banco de México and INEGI.
0
1
2
3
4
5
6
7
2010 2011 2012 2013 2014 2015 2016
Merchandise Services
Variability Interval
September
18
Inflation is projected to gradually increase towards year-end to slightly above 3 percent,and to fluctuate around this level in 2017. Survey-based long-term inflation expectationsremain anchored, although still somewhat above the target.
Inflation Expectations 1/
Annual %
1/ Median expectation.Source: Banco de México and Banamex.
Monetary Policy Outlook for Mexico
2.8
3.0
3.2
3.4
3.6
3.8
2010 2011 2012 2013 2014 2015 2016
Next 2-6 Years (Banamex) Next 5-8 Years (Banco de México)
Permanent TargetSeptember
October
19
CPI Inflation: Agriculture and Livestock%
Monetary Policy Outlook for Mexico
Demand pressures on prices are likely to remain subdued, given the expectation of anegative output gap throughout next year. The evolution of prices of agriculture andlivestock represents an upward risk, although of a transitory nature.
Source: Banco de México and INEGI.
-3
0
3
6
9
12
15
18
2010 2011 2012 2013 2014 2015 2016
Average 2000-2015: 5.8%
September
20
USD/MXN: Level and Volatility 1/
Pesos per dollar and %
1/ Implicit volatility in 1-month USD/MXN options.Note: Vertical lines indicate dates when the reference rate in Mexico was increased in 2015 (17 December) and 2016 (17 February, 30 June and 29 September).Source: Banco de México and Bloomberg.
Monetary Policy Outlook for Mexico
Therefore, the main risk for the inflation outlook arises from the evolution of the exchangerate of the peso.
4
6
8
10
12
14
16
18
20
12
13
14
15
16
17
18
19
20
Sep-14 Dec-14 Mar-15 Jun-15 Sep-15 Dec-15 Mar-16 Jun-16 Sep-16
<- Level Volatility ->
October
21
The steep depreciation of the Mexican peso over the last couple of years is explained by a combination of factors, including:
Normalization of monetary policy in the United States.
Uncertainty regarding the outcome of the US electoral process.
An environment of generalized anxiety among international investors.
The use of the peso as a hedging instrument against risks in other emerging markets andfor speculative purposes.
Weak oil prices.
Deterioration of public sector finances.
A higher current account deficit.
Monetary Policy Outlook for Mexico
Outline
22Monetary Policy Outlook for Mexico
Macroeconomic Policy Response4
Evolution of the Mexican Economy2
Final Remarks5
Monetary Policy in Mexico1
Inflation and its Determinants3
Notwithstanding a negative output gap, low inflation and well anchored inflationexpectations, monetary policy has been tightened four times since late 2015.
23Monetary Policy Outlook for Mexico
December 17, 2015 25bps increase to 3.25%.
A response to an increase in the target range for the federal funds rate in the US, inview of:
Close links between the Mexican and US economies;
An environment of widespread nervousness in international financial markets;
A very open capital account in Mexico; and
High peso-dollar exchange rate levels;
A narrowing of the interest rate differential between the US and Mexico could haveresulted in disorderly capital outflows, and risks for inflation and financial stability.
24Monetary Policy Outlook for Mexico
February 17, 2016Extraordinary Meeting
50bps increase to 3.75%.
June 30, 2016 50bps increase to 4.25%
September 29, 2016 50bps increase to 4.75%
Main explanatory factors:
Expectation of an upward trend for inflation even in the absence of further shocks;
Risks for inflation and its expectations from the depreciation of the exchange rate;
Possibility of a higher than anticipated peso-dollar rate for a significant period;
Potential non-linear effects of the exchange rate on prices; and
Risk of adverse signaling in the absence of decisive action.
Banco de México’s mandate.
2.75
3.25
3.75
4.25
4.75
5.25
5.75
6.25
6.75
7.25
1 1 3 6 1 2 3 5 10 20 30
15-Dec-15 16-Feb-16 29-Jun-16
28-Sep-16 6-Oct-16
25Monetary Policy Outlook for Mexico
Yield Curve%
Source: Banco de México and Proveedor Integral de Precios (PiP).
Months YearsDay
The impact of a higher monetary policy rate on economic activity has been alleviated by aflattening of the yield curve.
26
The Banco de México has noted that the latest increase in the monetary policy ratedoes not intend to begin a cycle of adjustments.
Considering the nature of some of the factors affecting the peso at present, andespecially the electoral process in the United States, it is difficult to evaluate thepossible trend of the monetary policy rate in Mexico in the very short term.
Beyond this special period, interest rates in Mexico are likely to be significantly affectedby the evolution of interest rates in the United States.
Monetary Policy Outlook for Mexico
27
1/ Based on market prices of futures for the Federal Funds Rate.Source: Banco de México with data from Bloomberg.
Monetary Policy Outlook for Mexico
Markets continue to anticipate a gradualtightening of monetary policy in the US.
The net effect should be beneficial forMexico’s economy.
If adequately anticipated, it need nothave a major impact on internationalfinancial markets.
However, under circumstances similar tothose prevailing at present, the absenceof a monetary policy response in Mexicowould give rise to major risks.
US: Probability of a 25bp Increase in the Targetfor the Federal Funds Rate1/
%
0%
25%
50%
75%
100%
125%
150%
175%
Sep
tem
ber
No
vem
ber
Dec
emb
er
Feb
ruar
y
Mar
ch
May
Jun
e
July
Sep
tem
ber
No
vem
ber
Dec
emb
er
2016 2017
Latest FOMC meeting: 21/09/2016
Current: 07/10/2016
28
Banco de México’s Board will closely monitor the evolution of all determinants ofinflation and its medium- to long-term expectations, and especially:
The exchange rate given its possible pass-through to consumer prices, withoutimplying an objective for the exchange rate.
The relative monetary policy stance between Mexico and the US.
The evolution of the output gap.
The Banco de México will adjust the monetary policy stance with all due flexibility,at the moment and in the magnitude that conditions require it, to consolidate theefficient convergence of inflation to the 3 percent target.
Monetary Policy Outlook for Mexico
29
Source: SHCP.
Strong public finances are essential to preserve macroeconomic stability and strengthenconfidence. The implementation of the announced program of fiscal adjustment in 2017would alleviate risks from this source…
Public Sector Finances, 2015-2017% of GDP
Monetary Policy Outlook for Mexico
-6
-5
-4
-3
-2
-1
0
1
Primary Balance PSBR
2015 2016 2017
-60
-50
-40
-30
-20
-10
0
10
Historical Balance of PSBR
30
Note: Data for 2016 corresponds to the first half.Source: Banco de México and INEGI.
… and from the current account which, although still within reasonable margins, hasgiven rise to some nervousness.
Mexico: Current Account Deficit and Net FDI Inflows% of GDP
Monetary Policy Outlook for Mexico
-1
0
1
2
3
4
19
95
19
96
19
97
19
98
19
99
20
00
20
01
20
02
20
03
20
04
20
05
20
06
20
07
20
08
20
09
20
10
20
11
20
12
20
13
20
14
20
15
20
16
Current Account Deficit
Net FDI Inflows
Emerging Market Economies: Current Account% of GDP
Source: IMF (World Economic Outlook, October 2016).
-8
-6
-4
-2
0
2
4
6
8
Co
lom
bia
Turk
ey
Per
u
Bra
zil
Mex
ico
Ind
on
esia
Ch
ile
Ind
ia
Po
lan
d
Mal
aysi
a
Hu
nga
ry
Ko
rea
2015 2016
31
Intervention in the foreign exchange market can also play a role in coping withexchange rate volatility.
The Foreign Exchange Commission has emphasized that anchoring of the Mexican pesowill be sought through the preservation of strong economic fundamentals.
However, it has also been noted that discretionary intervention in the foreign exchangemarket cannot be discarded should exceptional circumstances arise.
Monetary Policy Outlook for Mexico
Outline
32Monetary Policy Outlook for Mexico
Macroeconomic Policy Response4
Evolution of the Mexican Economy2
Final Remarks5
Monetary Policy in Mexico1
Inflation and its Determinants3
33
Mexico’s economy has performed relatively well in a rather difficult environment, but theneed to strengthen economic fundamentals has increased.
This implies:
Adherence to a monetary policy approach emphasizing prudence.
An adjustment of public finances leading to a sustained decline in the share of publicdebt in GDP.
The implementation of any policies required to ensure the preservation of financialstability.
Continued reinforcement of the domestic sources of growth.
Monetary Policy Outlook for Mexico