February, 2012
Inflation Report October-December 2011
1. External Conditions
2. Economic Activity in Mexico
3. Monetary Policy and Inflation
Determinants
4. Forecasts and Balance of Risks
Outline
Inflation Report October-December 2011
The world economic outlook has deteriorated as a result of the problems in Europe.
Recent stability factors in Europe:
Adoption of unconventional measures by the European Central Bank.
Progress in plans to address the fiscal problems.
Inflationary pressures have diminished as a result of the reduced dynamism of global economic activity.
An accommodative monetary policy stance in the majority of the economies is anticipated.
3 Inflation Report
October-December 2011
1. External Conditions
Emerging Economies: GDP Growth Forecasts for 2012
(%)
Source: Blue Chip. Source: Blue Chip.
-1.0
-0.5
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
Jan
-11
Feb
-11
Mar
-11
Ap
r-1
1
May
-11
Jun
-11
Jul-
11
Au
g-1
1
Sep
-11
Oct
-11
No
v-1
1
Dec
-11
Jan
-12
Feb
-12
U.S.
Euro Zone
Japan
0
1
2
3
4
5
6
7
8
9
10
Jan
-11
Feb
-11
Mar
-11
Ap
r-1
1
May
-11
Jun
-11
Jul-
11
Au
g-1
1
Sep
-11
Oct
-11
No
v-1
1
Dec
-11
Jan
-12
Feb
-12
Brazil China
India Mexico
Russia
1. External Conditions
Inflation Report October-December 2011
4
Advanced Economies: GDP Growth Forecasts for 2012
(%)
1. External Conditions U.S.: Public Balance 1/
(% of GDP)
60
80
100
120
140
160
180
200
80
90
100
110
120
130
140
I 199
0
IV 1
99
2
III 1
995
II 1
99
8
I 200
1
IV 2
00
3
III 2
006
II 2
00
9
Households'debt
Case-Shiller(left axis)
III 2
01
1
s.a./ Seasonally adjusted. Source: Federal Reserve and S&P.
U.S.: Households’ Debt and Housing Prices
(% of personal disposable income and index 2000=100; s.a.)
U.S.: Unemployment Rate and Employment-Population Ratio
(%)
54
56
58
60
62
64
66
0
2
4
6
8
10
12
Jan
-00
May
-01
Sep
-02
Jan
-04
May
-05
Sep
-06
Jan
-08
May
-09
Sep
-10
Jan
-12
Unemployment rate
Employment-populationratio (left axis)
Source: Bureau of Labor Statistics (BLS).
-12
-10
-8
-6
-4
-2
0
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
1/ CBO’s baseline scenario. Source: Congressional Budget Office (CBO).
Forecast
Inflation Report October-December 2011
5
1. External Conditions Euro Zone:
Industrial Production (Index Jan-2007=100; s.a.)
-90
-70
-50
-30
-10
10
30
50
Jan
-07
Jun
-07
No
v-0
7
Ap
r-0
8
Sep
-08
Feb
-09
Jul-
09
Dec
-09
May
-10
Oct
-10
Mar
-11
Au
g-1
1
Jan
-12
Euro Zone Greece Italy
Portugal Spain Germany
France
Euro Zone: Consumer Confidence
(Diffusion index; s.a.)
s.a./ Seasonally adjusted. Source: Eurostat.
s.a./ Seasonally adjusted. Source: European Commission.
Dec
-11
Inflation Report October-December 2011
6
60
70
80
90
100
110
120
130
Jan
-07
Jun
-07
No
v-0
7
Ap
r-0
8
Sep
-08
Feb
-09
Jul-
09
Dec
-09
May
-10
Oct
-10
Mar
-11
Au
g-1
1
Euro Zone Greece Italy
Portugal Spain Germany
France
Forecast Forecast
Selected Economies: Fiscal Balance 2/
(% of GDP)
1. External Conditions
2/ Spain, United States, France and Italy data from Fiscal Monitor, January 2012. Ireland, Greece and Portugal data from Fiscal Monitor, September 2011. 3/ Public Balance without Pemex investment. Source: Fiscal Monitor (IMF) and Mexico’s Ministry of Finance (SHCP).
-35
-30
-25
-20
-15
-10
-5
0
5
20
06
20
07
20
08
20
09
20
10
20
11
20
12
20
13
Spain
U.S.
France
Ireland
Italy
Greece
Mexico 3/
Portugal0
20
40
60
80
100
120
140
160
180
200
20
06
20
07
20
08
20
09
20
10
20
11
20
12
20
13
Spain U.S.
France Ireland
Italy Greece
Mexico Portugal
Selected Economies: Public Debt 1/
(% of GDP)
1/ Spain, United States, France and Italy data from Fiscal Monitor, January 2012. Ireland, Greece and Portugal data from Fiscal Monitor, September 2011. Source: Fiscal Monitor (IMF) and Mexico’s Ministry of Finance (SHCP).
Inflation Report October-December 2011
7
0
50
100
150
200
250
300
350
400
Jan
-07
Au
g-0
7
Mar
-08
Oct
-08
May
-09
Dec
-09
Jul-
10
Feb
-11
Sep
-11
U.S.
Euro Zone
3-month Libor-OIS and Euribor-EONIA Spread 1/
(Spread in basis points)
300
400
500
600
700
800
900
1,000
Jan
-08
Au
g-0
8
Mar
-09
Oct
-09
May
-10
Dec
-10
Jul-
11
Feb
-12
2/ On December 8, the ECB announced unconventional measures. Source: European Central Bank.
ECB: Lending to Euro Area Credit Institutions Related to Monetary Policy Operations 2/
(Billions of euros)
1/ On December 8, the ECB announced unconventional measures. Source: Bloomberg.
1. External Conditions
Feb
-12
8-Dec-11 8-Dec-11
Inflation Report October-December 2011
8
1. External Conditions
0
250
500
750
1,000
1,250
1,500
1,750
Jan
-10
Feb
-10
Mar
-10
Ap
r-1
0
May
-10
Jun
-10
Jul-
10
Au
g-1
0
Sep
-10
Oct
-10
No
v-1
0
Dec
-10
Jan
-11
Feb
-11
Mar
-11
Ap
r-1
1
May
-11
Jun
-11
Jul-
11
Au
g-1
1
Sep
-11
Oct
-11
No
v-1
1
Dec
-11
Jan
-12
Feb
-12
Germany
Ireland
Italy
Portugal
Spain
France
Mexico
Credit Default Swaps 1/
(Basis points)
1/ 5-year CDS. On December 8, the ECB announced unconventional measures. Source: Bloomberg.
8-Dec-11
Inflation Report October-December 2011
9
1. External Conditions
80
90
100
110
120
130
140
150
Jan
-08
Jun
-08
No
v-0
8
Ap
r-0
9
Sep
-09
Feb
-10
Jul-
10
Dec
-10
May
-11
Oct
-11
Brazil
Chile
Colombia
Mexico
Emerging Economies: Exchange Rate 1/
(Index 01-Jan-2008=100)
40
60
80
100
120
140
160
180
Jan
-08
Jun
-08
No
v-0
8
Ap
r-0
9
Sep
-09
Feb
-10
Jul-
10
Dec
-10
May
-11
Oct
-11
Brazil
Chile
Colombia
Mexico
Emerging Economies: Stock Exchange 2/
(Index 01-Jan-2008=100)
1/ On December 8, the ECB announced unconventional measures. Source: Bloomberg.
2/ On December 8, the ECB announced unconventional measures. Source: Bloomberg.
Depreciation against USD
Feb
-12
Feb
-12
Inflation Report October-December 2011
10
8-Dec-11 8-Dec-11
1. External Conditions
2
3
4
5
6
7
8
9
Jan
-10
Jun
-10
No
v-1
0
Ap
r-1
1
Sep
-11
Feb
-12
Corn
Wheat
50
60
70
80
90
100
110
120
130
140
Jan
-10
Jun
-10
No
v-1
0
Ap
r-1
1
Sep
-11
Feb
-12
WTI
Brent
Source: International Monetary Fund.
International Price of Commodities
(Index Jan-2002=100)
International Price of Crude Oil
(Dollars per barrel)
International Price of Wheat and Corn (Dollars per bushel)
Source: Bloomberg. Source: U.S. Department of Agriculture (USDA).
0
100
200
300
400
500
600
Jan
-02
No
v-0
2Se
p-0
3Ju
l-0
4M
ay-0
5M
ar-0
6Ja
n-0
7N
ov-
07
Sep
-08
Jul-
09
May
-10
Mar
-11
Jan
-12
Total
Energy
Food
Inflation Report October-December 2011
11
1. External Conditions Inflation in 2011 and Inflation Expectations for 2012 1/
(Annual % change)
1/ Blue and red lines show the average inflation for 2011 and 2012, respectively for advanced and emerging economies groups. Source: Central banks, statistics departments and expectations from Consensus Forecasts.
-2
0
2
4
6
8
10
Jap
an
Swit
zerl
and
No
rway
Euro
Zo
ne
Can
ada
Swed
en
U.S
.
Au
stra
lia
N.Z
.
U.K
.
Cze
ch R
ep.
Mal
aysi
a
Isra
el
Co
lom
bia
Thai
lan
d
Mex
ico
Hu
nga
ry
Ko
rea
Po
lan
d
Ch
ile
Per
u
Ph
ilip
pin
es
Sou
th A
fric
a
Ind
on
esia
Ch
ina
Turk
ey
Bra
zil
Ind
ia
2011 2012
1.6
2.5
4.7
4.2
Inflation Report October-December 2011
12
1. External Conditions
2. Economic Activity in Mexico
3. Monetary Policy and Inflation
Determinants
4. Forecasts and Balance of Risks
Outline
Inflation Report October-December 2011
2. Economic Activity in Mexico
70
90
110
130
150
170
190
Jan
-07
Jun
-07
No
v-0
7
Ap
r-0
8
Sep
-08
Feb
-09
Jul-
09
Dec
-09
May
-10
Oct
-10
Mar
-11
Au
g-1
1
Total
U.S.
Others
Manufacturing Exports by Region of Destination
(Index 2007=100; s.a.)
s.a./ Seasonally adjusted and trend data. Source: Banco de México.
Economic Activity Indicators 1/
(Index 2003=100; s.a.)
95
105
115
125
135
145
155
165
175
185
95
100
105
110
115
120
125
130
135
140
Jan
-07
Jun
-07
No
v-0
7
Ap
r-0
8
Sep
-08
Feb
-09
Jul-
09
Dec
-09
May
-10
Oct
-10
Mar
-11
Au
g-1
1
Total IGAE
Industrial production
Services IGAE
Agricultural IGAE (left axis)
s.a./ Seasonally adjusted and trend data. 1/ Industrial production up to December 2011. Total IGAE, services and agricultural data up to November 2011. Source: INEGI.
Dec
-11
Dec
-11
Inflation Report October-December 2011
14
2. Economic Activity in Mexico Commercial Establishments’ Sales
(Index 2008=100; s.a.) Investment and its Components
(Index 2005=100; s.a.)
s.a./ Seasonally adjusted and trend data. Source: INEGI.
s.a./ Seasonally adjusted. Source: INEGI.
87
89
91
93
95
97
99
101
103
105
107
Jan
-07
Jun
-07
No
v-0
7
Ap
r-0
8
Sep
-08
Feb
-09
Jul-
09
Dec
-09
May
-10
Oct
-10
Mar
-11
Au
g-1
1
Wholesale
Retail
No
v-1
1
No
v-1
1
Inflation Report October-December 2011
15
80
100
120
140
160
180
200
85
95
105
115
125
135
145
Jan
-07
Jun
-07
No
v-0
7
Ap
r-0
8
Sep
-08
Feb
-09
Jul-
09
Dec
-09
May
-10
Oct
-10
Mar
-11
Au
g-1
1
Total
Construction
National machinery and eqpt. (left axis)
Imported machinery and eqpt. (left axis)
16 Inflation Report
October-December 2011
2. Economic Activity in Mexico Total Real Wage Bill
(Annual % change)
-8
-6
-4
-2
0
2
4
6
8
10
12
I 200
6
IV 2
00
6
III 2
007
II 2
00
8
I 200
9
IV 2
00
9
III 2
010
II 2
01
1
Real wage bill
Real average income
Paid employed population
Source: Prepared by Banco de México with data from INEGI.
Commercial Banks’ Performing Credit for Consumption
(Real annual % change)
-40
-30
-20
-10
0
10
20
30
40
50
Jan
-08
Au
g-0
8
Mar
-09
Oct
-09
May
-10
Dec
-10
Jul-
11
Total
Credit cards
Durable goods 1/
Payroll and others 2/
Dec
-11
70
75
80
85
90
95
100
105
110
115
Jan
-05
Au
g-0
5
Mar
-06
Oct
-06
May
-07
Dec
-07
Jul-
08
Feb
-09
Sep
-09
Ap
r-1
0
No
v-1
0
Jun
-11
Jan
-12
s.a./ Seasonally adjusted and trend data. Source: INEGI and Banco de México.
1/ Includes credit for the acquisition of property and automobile credits. 2/ Others refers to personal credits, credit for payable leasing operations and other consumption credits. Source: Banco de México.
Consumer Confidence
(Index Jan-2003=100; s.a.)
IV 2
01
1
17 Inflation Report
October-December 2011
Producer Confidence (PCI) and Manufacturing Purchasing
Managers (PMI) Indices (50 points reference index; s.a.)
2. Economic Activity in Mexico How Do You Consider the
Current Situation in Companies to Make Investments?
(Balance of responses in %; s.a. 1/)
Leading Indicator of Mexico (Index 2003=100; s.a.)
42
44
46
48
50
52
54
56
58
30
35
40
45
50
55
60
Jan
-05
Mar
-06
May
-07
Jul-
08
Sep
-09
No
v-1
0
Jan
-12
PCI
PMI (left axis)-45
-30
-15
0
15
30
Jan
-06
Sep
-06
May
-07
Jan
-08
Sep
-08
May
-09
Jan
-10
Sep
-10
May
-11
Jan
-12
105
110
115
120
125
130
Jan
-07
No
v-0
7
Sep
-08
Jul-
09
May
-10
Mar
-11
s.a./ Seasonally adjusted and trend data. Source: Encuesta Mensual de Opinión Empresarial; INEGI and Banco de México.
s.a./ Seasonally adjusted and trend data. 1/ 3-month moving average. Source: Encuesta Mensual de Coyuntura en el Sector Manufacturero. Banco de México.
No
v-1
1
s.a./ Seasonally adjusted. Source: INEGI.
1. External Conditions
2. Economic Activity in Mexico
3. Monetary Policy and Inflation
Determinants
4. Forecasts and Balance of Risks
Outline
Inflation Report October-December 2011
The Board of Governors maintained the Overnight Interbank Interest Rate at 4.5 percent from October to January.
The conduction of monetary policy considered:
Transition toward a less favorable growth environment.
Slack conditions in the labor market.
The recent increase in inflation is the result of transitory phenomena, reflecting relative prices adjustments.
The exchange rate’s effect on inflation is anticipated to be moderate and temporary.
Well-anchored inflation expectations.
Inflation Report October-December 2011
19
3. Monetary Policy and Inflation Determinants
Consumer Price Index
(Annual % change)
Source: Banco de México and INEGI.
0
1
2
3
4
5
6
7
8
9
10
I 200
5
II 2
00
5
III 2
005
IV 2
00
5
I 200
6
II 2
00
6
III 2
006
IV 2
00
6
I 200
7
II 2
00
7
III 2
007
IV 2
00
7
I 200
8
II 2
00
8
III 2
008
IV 2
00
8
I 200
9
II 2
00
9
III 2
009
IV 2
00
9
I 201
0
II 2
01
0
III 2
010
IV 2
01
0
I 201
1
II 2
01
1
III 2
011
IV 2
01
1
CPI
Core
Non-core
Inflation Report October-December 2011
20
3. Monetary Policy and Inflation Determinants
Subindices of Core Merchandise Prices
(Annual % change)
Source: Banco de México and INEGI.
Subindices of Core Services Prices
(Annual % change)
Source: Banco de México and INEGI.
0
1
2
3
4
5
6
7
8
9
10
IV 2
00
4
II 2
00
5
IV 2
00
5
II 2
00
6
IV 2
00
6
II 2
00
7
IV 2
00
7
II 2
00
8
IV 2
00
8
II 2
00
9
IV 2
00
9
II 2
01
0
IV 2
01
0
II 2
01
1
IV 2
01
1
Merchandise Food, beverages and tobacco Non-food merchandise
Inflation Report October-December 2011
21
3. Monetary Policy and Inflation Determinants
0
1
2
3
4
5
6
7
8
9
10
IV 2
00
4
II 2
00
5
IV 2
00
5
II 2
00
6
IV 2
00
6
II 2
00
7
IV 2
00
7
II 2
00
8
IV 2
00
8
II 2
00
9
IV 2
00
9
II 2
01
0
IV 2
01
0
II 2
01
1
IV 2
01
1
Services
Housing
Education (tuition)
Other services
Output Gap 1/
(% of potential output; s.a.) Tradables and Non-tradables
Output Gap 3/
(% of potential output; s.a.)
s.a./ Calculated with seasonally adjusted data. 1/ Estimated using the Hodrick-Prescott (HP) filter with tail correction method; See Banco de México (2009), “Inflation Report April – June 2009”, p.69. The shaded area is the 95% confidence interval of the output gap, calculated with the unobserved components method. 2/ GDP figures up to the third quarter of 2011; IGAE up to November 2011. Source: Calculated by Banco de México with data from INEGI.
s.a./ Calculated with seasonally adjusted data. 3/ Estimated using the Hodrick-Prescott (HP) filter with tail correction method; See Banco de México (2009), “Inflation Report April – June 2009”, p.69. 4/ Includes mining and manufacturing. 5/ Includes services, construction and electricity, gas and water. Source: Calculated by Banco de México with data from INEGI.
-14
-12
-10
-8
-6
-4
-2
0
2
4
6
8
Jan
-04
Jun
-04
No
v-0
4A
pr-
05
Sep
-05
Feb
-06
Jul-
06
Dec
-06
May
-07
Oct
-07
Mar
-08
Au
g-0
8Ja
n-0
9Ju
n-0
9N
ov-
09
Ap
r-1
0Se
p-1
0Fe
b-1
1Ju
l-1
1
GDP 2/
IGAE 2/
-12
-10
-8
-6
-4
-2
0
2
4
6
Jan
-04
Jun
-04
No
v-0
4A
pr-
05
Sep
-05
Feb
-06
Jul-
06
Dec
-06
May
-07
Oct
-07
Mar
-08
Au
g-0
8Ja
n-0
9Ju
n-0
9N
ov-
09
Ap
r-1
0Se
p-1
0Fe
b-1
1Ju
l-1
1
IGAE: Tradables 4/
IGAE: Non-tradables 5/
No
v-1
1
No
v-1
1
Inflation Report October-December 2011
22
3. Monetary Policy and Inflation Determinants
s.a./ Seasonally adjusted. Source: INEGI.
1/ Permanent and temporary workers in urban areas. Source: IMSS and seasonally adjusted by Banco de México.
s.a./ Seasonally adjusted and trend data. Source: Prepared by Banco de México with seasonally adjusted data from the Extended Industry Survey (Encuesta Industrial Ampliada), INEGI.
86
88
90
92
94
96
98
100
102
104
106
108
Jan
-07
No
v-0
7
Sep
-08
Jul-
09
May
-10
Mar
-11
Unit cost
Productivity
Dec
-11
13.4
13.6
13.8
14.0
14.2
14.4
14.6
14.8
15.0
15.2
15.4
15.6
Jan
-07
Jun
-07
No
v-0
7A
pr-
08
Sep
-08
Feb
-09
Jul-
09
Dec
-09
May
-10
Oct
-10
Mar
-11
Au
g-1
1Ja
n-1
2
Original
Seasonally adjusted
2
3
4
5
6
7
Jan
-07
Jun
-07
No
v-0
7
Ap
r-0
8
Sep
-08
Feb
-09
Jul-
09
Dec
-09
May
-10
Oct
-10
Mar
-11
Au
g-1
1
National Unemployment Rate (%; s.a.)
IMSS-insured Workers 1/
(Million workers) Productivity and
Unit Cost of Labor Force in the Manufacturing Sector
(Index 2008=100; s.a.)
No
v-1
1
Inflation Report October-December 2011
23
3. Monetary Policy and Inflation Determinants
24 Inflation Report
October-December 2011
-0.6
-0.4
-0.2
0.0
0.2
0.4
0.6
0.8
1.0
1.2
No
v-1
1
Dec
-11
Jan
-12
Feb
-12
Mar
-12
Ap
r-1
2
May
-12
Jun
-12
Jul-
12
Au
g-1
2
Sep
-12
Oct
-12
Oct-11
Jan-12
Monthly Headline Inflation Expectations for 2011 and 2012 1/
(%)
Inflation Expectations for the End of 2012
(%)
Source: Banco de México’s survey.
3.0
3.5
4.0
4.5
5.0
5.5
Jan
-10
Mar
-10
May
-10
Jul-
10
Sep
-10
No
v-1
0
Jan
-11
Mar
-11
May
-11
Jul-
11
Sep
-11
No
v-1
1
Jan
-12
Headline
Core
Non-core
4.75
3.79
3.50
3. Monetary Policy and Inflation Determinants
1/ Black bars are observed data. Source: Banco de México’s survey.
25 Inflation Report
October-December 2011
1.0
1.5
2.0
2.5
3.0
3.5
4.0
4.5
5.0
Jan
-10
Mar
-10
May
-10
Jul-
10
Sep
-10
No
v-1
0
Jan
-11
Mar
-11
May
-11
Jul-
11
Sep
-11
No
v-1
1
Jan
-12
End 2012End 2013Next 4 yearsNext 5-8 yearsVariability interval 3.0
3.5
4.0
4.5
5.0
5.5
Jan
-05
Jun
-05
No
v-0
5
Ap
r-0
6
Sep
-06
Feb
-07
Jul-
07
Dec
-07
May
-08
Oct
-08
Mar
-09
Au
g-0
9
Jan
-10
Jun
-10
No
v-1
0
Ap
r-1
1
Sep
-11
Feb
-12
10-year bond break-even inflation
20-day moving average
1/ The break-even inflation and inflationary risk implicit in 10-year bonds is calculated based on nominal and real interest rates of the secondary market. Source: Banco de México estimate with data from Bloomberg.
Source: Banco de México’s survey.
Headline Inflation Expectations (%)
Break-even Inflation and Inflationary Risk 1/
(%)
3. Monetary Policy and Inflation Determinants
Interest Rate Spread between Mexico and the U.S.
(Percentage points)
1/ Since January 21, 2008, the one-day (overnight) interest rate corresponds to the target for the Overnight Interbank Interest Rate. Source: Banco de México and Federal Reserve.
2/ Since January 21, 2008, the one-day (overnight) interest rate corresponds to the target for the Overnight Interbank Interest Rate. Source: Banco de México and Proveedor Integral de Precios (PiP).
3
4
5
6
7
8
9
10
11
12
13
Jul-
07
Dec
-07
May
-08
Oct
-08
Mar
-09
Au
g-0
9
Jan
-10
Jun
-10
No
v-1
0
Ap
r-1
1
Sep
-11
Feb
-12
1 day
1 month
3 month
1 year
10 year
30 year
Mexico and U.S. Reference Rate 1/
(%) Interest Rates of Government
Securities 2/
(%)
0
1
2
3
4
5
6
7
8
9
Jul-
07
Dec
-07
May
-08
Oct
-08
Mar
-09
Au
g-0
9
Jan
-10
Jun
-10
No
v-1
0
Ap
r-1
1
Sep
-11
Feb
-12
1 day
1 month
3 month
1 year
10 year
30 year
0
1
2
3
4
5
6
7
8
9
10
Jul-
07
Dec
-07
May
-08
Oct
-08
Mar
-09
Au
g-0
9
Jan
-10
Jun
-10
No
v-1
0
Ap
r-1
1
Sep
-11
Feb
-12
Mexico
U.S.
Source: Proveedor Integral de Precios (PiP) and U.S. Department of the Treasury.
Inflation Report October-December 2011
26
3. Monetary Policy and Inflation Determinants
12.79
12.74
12.65
Exchange Rate and its Expectations for the End of 2012 and 2013
(Pesos per dollar)
11.0
11.5
12.0
12.5
13.0
13.5
14.0
14.5
Dec
-09
Feb
-10
Ap
r-1
0
Jun
-10
Au
g-1
0
Oct
-10
Dec
-10
Feb
-11
Ap
r-1
1
Jun
-11
Au
g-1
1
Oct
-11
Dec
-11
Feb
-12
Observed
2012
2013
1/ The observed exchange rate is the daily FIX exchange rate. The latest data for the observed exchange rate is February 13, 2012 and the foreign exchange rate forecasts is February 7, 2012. Source: Banco de México and Banamex survey.
Government Securities Holdings by Foreign Investors (Billions of pesos)
0
50
100
150
200
250
300
350
150
250
350
450
550
650
750
Jan
-08
Jun
-08
No
v-0
8
Ap
r-0
9
Sep
-09
Feb
-10
Jul-
10
Dec
-10
May
-11
Oct
-11
Bonds
CETES (left axis)
Source: Banco de México.
Inflation Report October-December 2011
27
3. Monetary Policy and Inflation Determinants
Feb
-12
The deterioration of the international economic environment implies as a natural response a depreciation of the real exchange rate in Mexico.
It is foreseeable that the adjustment of the real exchange rate will initially be through the nominal exchange rate.
As domestic prices adjust, it should be expected that part of this initial nominal exchange rate depreciation will revert.
Until now, there are no signs of second round effects.
It is anticipated that the effect of the exchange rate depreciation on inflation will not affect the economy’s price formation process.
28
Inflation Report October-December 2011
3. Monetary Policy and Inflation Determinants
1. External Conditions
2. Economic Activity in Mexico
3. Monetary Policy and Inflation
Determinants
4. Forecasts and Balance of Risks
Outline
Inflation Report October-December 2011
4. Forecasts and Balance of Risks
Growth of the Mexican Economy:
Between 3.0 and 4.0% in 2012 and 2013.
Employment:
Increase of between 500 and 600 thousand IMSS-insured workers in 2012 and 2013.
Current Account:
Deficit of USD 13.7 billion (1.2% of GDP) for 2012.
Deficit of USD 17.7 billion (1.4% of GDP) for 2013.
Inflation Report October-December 2011
30
-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
-9
-8
-7
-6
-5
-4
-3
-2
-1
0
1
2
3
4
5
6
7
8
9
-9
-8
-7
-6
-5
-4
-3
-2
-1
0
1
2
3
4
5
6
7
8
9
Q2 Q4 Q2 Q4 Q2 Q4 Q2 Q4 Q2 Q4 Q2 Q4
4. Forecasts and Balance of Risks
GDP Growth (Annual %; s.a.)
2011 Q4
2010 2013 2008 2009 2011 2012
2012 Q4
2013 Q4
s.a./ Seasonally adjusted. Source: INEGI and Banco de México.
2011 Q4
2012 Q4
2013 Q4
2010 2013 2008 2009 2011 2012
Output Gap 1/
(%)
1/ Calculated with seasonally adjusted data. Source: Banco de México.
Fan Charts
Inflation Report October-December 2011
31
4. Forecasts and Balance of Risks
Inflation Report October-December 2011
32
Balance of Risks for the Growth Scenario
Downside: Upward:
That the U.S. economy grows at lower rates than expected.
An increase in investors´ risk aversion.
That the actions taken by European authorities continue to improve the functioning of financial markets.
That the U.S. economy evolves beyond expectations.
It is estimated that inflation will maintain a performance consistent with the convergence process towards the 3 percent permanent inflation target:
Headline Inflation:
• 2012: inflation most likely will lie between 3 and 4 percent, in line with the forecast presented in the last Inflation Report.
• 2013: it is also anticipated to locate between 3 and 4 percent and to approach the lower bound of that interval.
Core Inflation:
• 2012: it will most likely be very close to 3 percent.
• 2013: it is expected to remain around 3 percent.
4. Forecasts and Balance of Risks
Inflation Report October-December 2011
33
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
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
Q2 Q4 Q2 Q4 Q2 Q4 Q2 Q4 Q2 Q4 Q2 Q4 Q2 Q4 Q2 Q4
Observed inflation
Headline inflation target
Variability interval
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
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
Q2 Q4 Q2 Q4 Q2 Q4 Q2 Q4 Q2 Q4 Q2 Q4 Q2 Q4 Q2 Q4
Observed inflation
Headline inflation target
Variability interval
Annual Headline Inflation
(Annual % change)
Source: INEGI and Banco de México. Source: INEGI and Banco de México.
Annual Core Inflation (Annual % change)
Fan Charts
2008 2010 2012 2006 2008 2010 2012 2006
4. Forecasts and Balance of Risks
2011 Q4
2012 Q4
2013 Q4
2011 Q4
2012 Q4
2013 Q4
Inflation Report October-December 2011
34
4. Forecasts and Balance of Risks
Inflation Report October-December 2011
35
External financial shocks that could lead to a significant depreciation of the exchange rate.
The possible rebound of some agricultural product prices.
→ In sum, the balance of risks for inflation remains neutral.
Further weakening in both external and domestic demand.
Improvement in the risk perception of Mexico in international markets.
Balance of Risks for the Inflation Forecast
Downside: Upward:
4. Forecasts and Balance of Risks The economy has shown great resilience to external shocks, as a
result of the country’s strong macroeconomic fundamentals:
Monetary policy aimed at ensuring price stability.
Prudent fiscal policy.
Flexible exchange rate regime.
Well-capitalized financial system with an adequate regulation and supervision.
However, it is crucial to strengthen the domestic sources of growth.
Pending structural reforms are essential to raise productivity and the potential growth rate of the economy in an environment of low and stable inflation.
Inflation Report October-December 2011
36
The Board of Governors considers that the current monetary policy stance is conducive to reaching the 3 percent permanent inflation target. In addition, the Board of Governors:
Has been committed to closely follow the world economic growth outlook and its possible implications for the Mexican economy, which, in a context of extremely loose monetary conditions in the main advanced economies, could eventually make convenient an easing of the monetary policy stance.
Will continue to monitor the behavior of the inflation determinants that might signal widespread pressures on prices, in order to adequately adjust the monetary stance, pursuing at all times the convergence of inflation to its 3 percent permanent target.
4. Forecasts and Balance of Risks
Inflation Report October-December 2011
37