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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
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U.S. Eurozone Japan U.K.
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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
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6
8
20
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19
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India China Russia Brazil Mexico
October 2017April 2018
Advanced
Emerging
World
April 2018October 2017
April 2018October 2017
Quarterly Report January - March 2018
-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
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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
Quarterly Report January - March 2018 4
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
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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
Quarterly Report January - March 2018 5
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
Quarterly Report January - March 2018 6
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
Quarterly Report January - March 2018 7
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.
Quarterly Report January - March 2018
75
85
95
105
115
125
135
145
20
14
20
15
20
16
20
17
20
18
Quarterly Report January - March 2018 9
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
Quarterly Report January - March 2018 10
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
External Conditions1
Evolution of the Mexican Economy2
Forecasts and Final Remarks5
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.
Quarterly Report January - March 2018
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.
Quarterly Report January - March 2018
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.
Quarterly Report January - March 2018
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
Quarterly Report January - March 2018
-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
Quarterly Report January - March 2018
-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
Quarterly Report January - March 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
Quarterly Report January - March 2018 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.
Quarterly Report January - March 2018
March
Firms 4/
Housing
Consumption
Total
External
Domestic 2/
Q1-2018
Total Financing to the Non-Financial Private SectorReal annual % change
Delinquency Rates%
Quarterly Report January - March 2018
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
21Quarterly Report January - March 2018
Outline
External Conditions1
Evolution of the Mexican Economy2
Forecasts and Final Remarks5
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
Quarterly Report January - March 2018 22
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
Source: Banco de México and INEGI.
Quarterly Report January - March 2018
Merchandise
Food, Beverages and Tobacco
Non-food Merchandise Housing
Services
Other Services
Education
Core Price IndexAnnual % change
1F-May1F-May
Source: Banco de México and INEGI.
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
Source: Banco de México and INEGI.
-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
Quarterly Report January - March 2018 24
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
Source: Banco de México and INEGI.
-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
Quarterly Report January - March 2018 25
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
Source: Banco de México and INEGI.
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)
Annual % Change (Line)
Incidences (Bars)
Annual % Change (Line)
Incidences (Bars)
Annual % Change (Line)
26Quarterly Report January - March 2018
Outline
External Conditions1
Evolution of the Mexican Economy2
Forecasts and Final Remarks5
Inflation3
Monetary Policy4
Quarterly Report January - March 2018 27
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
28Quarterly Report January - March 2018
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
Quarterly Report January - March 2018
Quarterly Report January - March 2018 30
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
Quarterly Report January - March 2018 31
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.
Quarterly Report January - March 2018
33Quarterly Report January - March 2018
Outline
External Conditions1
Evolution of the Mexican Economy2
Forecasts and Final Remarks5
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
Quarterly Report January - March 2018 34
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
(%)
Report Oct-Dec 2017 Jan-Mar 2018
2018 2.0 – 3.0 2.0 – 3.0
2019 2.2 – 3.2 2.2 – 3.2
Current Account Deficit
(% of GDP)
Report Oct-Dec 2017 Jan-Mar 2018
2018 2.1 2.1
2019 2.3 2.3
2018Q4
2019Q4
35Quarterly Report January - March 2018
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
Central Scenario Current Report
Quarterly Report January - March 2018 36
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
Central Scenario Previous Report
Central Scenario Current Report
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
Quarterly Report January - March 2018 37
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
Central Scenario Previous Report
Central Scenario Current Report
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
Central Scenario Previous Report
Central Scenario Current Report
Headline Inflation Target
Quarterly Report January - March 2018 38
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.
Quarterly Report January - March 2018 39
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.
Quarterly Report January - March 2018 40
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.
Quarterly Report January - March 2018 41
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.
Quarterly Report January - March 2018 42
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
Quarterly Report January - March 2018 43
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