Presentación de PowerPoint · November, 2016 50 bp increment to 5.25 percent. 3 December, 2016 50...

Quarterly Report

March 1, 2017

October – December 2016

Outline

1Quarterly Report October - December 2016

Monetary Policy1

Forecasts and Final Remarks5

External Conditions2

Inflation and its Determinants 4

Evolution of the Mexican Economy3

Quarterly Report October - December 2016

Conduction of Monetary Policy

2

During 2016, the Mexican economy faced a complex environment, characterized by high volatility asa consequence of uncertainty regarding the process of the monetary policy normalization in the U.S.and the electoral process that took place in that country and its outcome, among other factors.

The impact of this environment on domestic financial markets was notorious at the end of theyear and in early 2017. The Mexican peso observed high volatility and a number of episodes ofdepreciation, while peso-denominated interest rates increased across all terms.

As of the end of January, these variables notably reverted their trajectories. The monetary policyactions have contributed to a better performance of the exchange rate, as well as the measures

announced by the Foreign Exchange Commission.

Furthermore, in early 2017 inflation was affected by the liberalization of energy prices, inparticular, gasoline prices.

The actions of the Board of Governors have been seeking to better anchor inflation expectations in thischallenging environment.

November, 2016 50 bp increment to 5.25 percent.

3

50 bp increment to 5.75 percent.December, 2016

50 bp increment to 6.25 percent.February, 2017


Thus, in order to prevent the price formation process in the economy from contaminating, to anchorinflation expectations, and to reassure inflation convergence to its target, the Board of Governorsdecided to increase the target for the Overnight Interbank Interest Rate.

These actions were carried out so that the adjustment in relative prices derivedfrom the real exchange rate depreciation, and, in the case of the latter decision, alsofrom the impact generated by the liberalization of gasoline prices, would take placein an orderly manner.

2

4

6

8

10

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

20

17

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

1/ Before January 20, 2008 it refers to the observed Overnight Interbank Interest Rate.Source: INEGI and Banco de México.


Mexico: Target for the OvernightInterbank Interest Rate 1/

February

Headline Inflation

Core Inflation

1F-Feb

Considering the monetary policy decisions described above, the Central Bank increased itsreference rate by a total of 300 basis points between 2016 and so far in 2017.

Outline


Monetary Policy1





1

2

3

4

5

6

7

20

11

20

12

20

13

20

14

20

15

20

16

20

17

20

18

Quarterly Report October - December 2016 6

World GDP Growth ForecastAnnual % change

Advanced Economies GDP Growth ForecastsAnnual % change

Global Trade of Goods1/ and Markit Global PMI Manufacturing

Annual % change of 3-month moving average and Index, s. a.

Source: IMF, WEO October 2016 and January 2017. Source: IMF, WEO October 2016 and January 2017. 1/ Refers to the sum of imports and exports.s. a. / Seasonally adjusted data.Source: CPB Netherlands and Markit.

ForecastsWEO JanuaryWEO October

Advanced

World

Emerging

20

16

20

17

20

18

20

16

20

17

20

18

20

16

20

17

20

18

20

16

20

17

20

18

U.S. Euro Zone Japan UnitedKingdom

0.0

0.5

1.0

1.5

2.0

2.5

3.0

January 2017October 2016

-5

0

5

10

15

20

46

50

54

58

62

66

20

10

20

11

20

12

20

13

20

14

20

15

20

16

20

17

January

PMI New Export Orders

Trade Volume

December

During 4Q 2016, world economic activity and its outlook kept recovering. In this context,global trade somewhat reactivated.

0.0

0.3

0.6

0.9

1.2

1.5

1.8

2.1

2.4

2.7

Jan

-15

Mar

-15

May

-15

Jul-

15

Sep

-15

No

v-1

5

Jan

-16

Mar

-16

May

-16

Jul-

16

Sep

-16

No

v-1

6

Jan

-17


2

3

4

5

6

7

8

9

10

11

-800

-600

-400

-200

0

200

400

600

20

07

20

08

20

09

20

10

20

11

20

12

20

13

20

14

20

15

20

16

20

17

Change in Non-farm Payrolls and Unemployment Rate

Thousands of jobs and % of EAP, s. a.

Wage IndicatorsAnnual % change, s. a.

Personal Consumption Expenditures Price Index and Inflation Expectations

Annual % change

EAP / Economically Active Population.s. a. / Seasonally adjusted data.Source: Bureau of Labor Statistics (BLS).

s. a. / Seasonally adjusted data.Source: Bureau of Labor Statistics.

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 and Bureau of Economic Analysis.

January

United States

InflationExpectations 1/

PCE: Headline

PCE: Core

DecemberFebruary

0

1

2

3

4

5

20

00

20

04

20

08

20

12

20

16

Average Hourly Earnings

Employment Cost Index

4Q-2016

Unemployment Rate

Change in Non-farm Payrolls

The U.S. economy kept expanding and its labor market conditions continued strengthening. In turn,inflation increased, despite still remaining below the Federal Reserve’s target.

15

25

35

45

55

65

75

85

95

105

115

125

201

0

201

1

201

2

201

3

201

4

201

5

201

6

201

7

201

8

WTI

Futures 1/


Crude Oil Prices USD per barrel

1/ Data up to February 28, 2017.Source: Bloomberg.

Commodity Prices Index 2005=100

Source: International Monetary Fund.

40

60

80

100

120

140

160

180

200

220

240

260

20

10

20

11

20

12

20

13

20

14

20

15

20

16

20

17

Total

Energy

IndustrialMetals

Food

January

Mexican Oil Mix

Commodity prices recovered moderately over the period covered by this report.

-0.7

-0.2

0.3

0.8

1.3

1.8

Oct

-13

Feb

-14

Jun

-14

Oct

-14

Feb

-15

Jun

-15

Oct

-15

Feb

-16

Jun

-16

Oct

-16

Feb

-17

Jun

-17

Oct

-17

Feb

-18

Jun

-18

Oct

-18

-0.5

0.0

0.5

1.0

1.5

2.0

2.5

3.0

Jan

-16

Feb

-16

Mar

-16

Ap

r-1

6

May

-16

Jun

-16

Jul-

16

Au

g-1

6

Sep

-16

Oct

-16

No

v-1

6

Dec

-16

Jan

-17

Feb

-17

Advanced Economies: Expected MonetaryPolicy Rates Implicit in OIS Curve 1/

%

Advanced Economies: 10-Year GovernmentBond Interest Rates

%

United States: DXY andTrade-Weighted US Dollar Index

Index 01-Jan-2015 = 100

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 (0.50% - 0.75%).Source: Banco de México with data from Bloomberg.

Source: Bloomberg. 3/ DXY index is estimated by the Intercontinental Exchange (ICE) based on theweighted geometric mean of the dollar’s value compared with a basket of 6 othermajor currencies which are: EUR: 57.6%, JPY: 13.6%, GBP: 11.9%, CAD: 9.1%, SEK:4.2% and CHF: 3.6%. Base=100. 4/ Trade-Weighted Index of the Federal Reserve;main trade partners: China (21.3%), Euro Zone (16.38%), Canada (12.7%), Mexico(11.9%), Japan (6.9%), South Korea (3.9%), United Kingdom (3.35%).Source: Bloomberg.

Federal Reserve 2/

ECB Main RefinancingOperations

Bank of England

Bank of JapanECB Deposit Facility

Dec.-17

February

U.S.

Euro Zone

U.K.

Japan

Implied target rate in OIS curveNovember 7, 2016

Implied target rate in OIS curveFebruary 28, 2017

97

100

103

106

109

112

115

118

Dec

-14

Feb

-15

Ap

r-1

5

Jun

-15

Au

g-1

5

Oct

-15

Dec

-15

Feb

-16

Ap

r-1

6

Jun

-16

Au

g-1

6

Oct

-16

Dec

-16

Feb

-17

DXY 3/

Trade-Weighted Index(TWI) 4/

Dec.-18


February

Appreciation

The expected path for the federal funds rate signals a faster-than-anticipated pace of monetarynormalization, in part, due to the expected considerable fiscal expansion in the U.S.

-90

-70

-50

-30

-10

10

30

50

70

90

110

1 4 71

01

31

61

92

22

52

83

13

43

74

04

34

64

95

2

Weeks

2008

2009

2012

2013

2015

2016

Currency Option Implied Volatility 1/

%Accumulated Capital Flows (Debt and Equity) 2/

Billions of dollarsNominal Exchange Rate against USD

Index 01-Jan-2015 = 100

1/ The average refers to the volatility of currency options for Brazil, Chile,Colombia, Turkey, South Africa, South Korea and Indonesia.Source: Bloomberg.

2/ The sample covers funds used for the buying-selling of stocks and bondsfrom emerging countries, recorded in advanced countries. Flows excludeportfolio performance and changes in the exchange rate.Source: Emerging Portfolio Fund Research.

Source: Bloomberg.

22-Feb.

90

100

110

120

130

140

150

160

Dec

-14

Feb

-15

Ap

r-1

5

Jun

-15

Au

g-1

5

Oct

-15

Dec

-15

Feb

-16

Ap

r-1

6

Jun

-16

Au

g-1

6

Oct

-16

Dec

-16

Feb

-17

Korea

Chile

Colombia

South Africa

Brazil

Mexico

February

Emerging Markets

5

10

15

20

25

30

Dec

-14

Feb

-15

Ap

r-1

5

Jun

-15

Au

g-1

5

Oct

-15

Dec

-15

Feb

-16

Ap

r-1

6

Jun

-16

Au

g-1

6

Oct

-16

Dec

-16

Feb

-17

February

Mexico

Average 2017


In the last months of 2016, investment portfolios registered significant re-compositions, as a result ofthe expectation of possible fiscal stimuli in the U.S. In contrast, in 2017, greater stability has beenobserved so far, and in some cases these effects reverted.

Outline


Monetary Policy1





0.1 0

.6-0

.1-1

.9

-3.9

-1.0

2.1

1.7

1.3 1.4

0.9

0.8 1

.00

.91

.50

.80

.71

.50

.20

.90

.4-0

.81

.10

.4 0.5

1.0

0.5 0

.70

.6 0.8

0.6

0.4 0.5

0.1

1.1

0.7

-5

-4

-3

-2

-1

0

1

2

3

4

20

08

20

09

20

10

20

11

20

12

20

13

20

14

20

15

20

16


Gross Domestic ProductQuarterly % change, s. a.

70

85

100

115

130

145

160

175

190

90

95

100

105

110

115

120

125

130

20

08

20

09

20

10

20

11

20

12

20

13

20

14

20

15

20

16

Global Indicator of Economic Activity Index 2008=100, s. a.

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


4Q-2016

Services

Total

Industrial

Agricultural

December

In 4Q 2016 the Mexican economy kept expanding, although at a lower growth rate than in theprevious quarter.

70

80

90

100

110

120

130

140

150

160

20

08

20

10

20

12

20

14

20

16


70

80

90

100

110

120

130

140

20

08

20

09

20

10

20

11

20

12

20

13

20

14

20

15

20

16

Industrial ActivityIndex 2008=100, s. a.

Global Indicator of Economic Activity: ServicesIndex 2008=100, s. a.

s. a. / Seasonally adjusted data.Source: Monthly Indicator of Industrial Activity, Mexico’s System ofNational Accounts, INEGI.


December

Transport andMass Media

Temporary lodging services, and foodpreparation services

Financial andReal Estate

Trade

Mining

Manufacturing

Construction

Electricity

December

Total

Within the industrial production, mining kept falling. In contrast, manufacturing production observeda positive trend. It stands out that the expansion of services has been practically widespread acrossall of its sectors.

30

50

70

90

110

130

150

170

190

210

230

250

20

08

20

10

20

12

20

14

20

16


Exports kept improving as a result of both the real exchange rate depreciation and anincipient improvement in the levels of global activity.

Total Non-Automotive Automotive

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



70

80

90

100

110

120

130

140

150

160

170

20

08

20

10

20

12

20

14

20

16

70

80

90

100

110

120

130

140

150

20

08

20

10

20

12

20

14

20

16

January January January

Total

U.S.

Rest of the World

Total

Rest of the World

Total

Rest of the World

Manufacturing ExportsIndex 2008=100, s. a.

U.S.

U.S.

-4

-3

-2

-1

0

1

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


Thus, in 4Q 2016, there was a significant correction in the current account, derived from theadjustment of the trade balance, high dynamism of workers’ remittances, and a greater amountof international travelers.

-10,000

-8,000

-6,000

-4,000

-2,000

0

2,000

4,000

6,000

8,000

200

8

201

0

201

2

201

4

201

6

Trade BalanceUSD millions

Current Account % of GDP

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

4Q-2016

Oil

Non-Oil

Total

20

16

-1Q

20

16

-2Q

20

16

-3Q

20

16

-4Q

60

70

80

90

100

110

120

130

20

08

20

09

20

10

20

11

20

12

20

13

20

14

20

15

20

16

12

16

20

24

28

32

36

40

44

1.6

1.8

2.0

2.2

2.4

2.6

2.8

20

08

20

09

20

10

20

11

20

12

20

13

20

14

20

15

20

16

20

17

-10

0

10

20

30

40

50

20

12

20

13

20

14

20

15

20

16

20

17

Domestic Private Consumption Index 2008=100; s. a.

Commercial Banks’ ConsumerPerforming Credit 1/

Real annual % change

Workers’ RemittancesUSD billions and constant MXN billions; s. a.

s. a. / Seasonally adjusted data.Source: INEGI.

1/ It includes Sofomes ER subsidiaries of bank institutions and financial groups.2/ It includes credit for payable leasing operations and other consumer credits.3/ From July 2011 onwards, figures are adjusted in order to avoid distortions dueto the reclassification from acquisition of consumer durables to other consumercredits by one banking institution.4/ It includes credit for movable property acquisition and auto loans.Source: Banco de México.

s. a. / Seasonally adjusted data .5/ Prices as of the second fortnight of December 2010.Source: Banco de México.

ImportedGoods

Total Private Consumption

Private consumption kept exhibiting a positive trajectory, as a reflection of the dynamismobserved in the component of domestic goods and services, while the consumption ofimported goods and services remained weak.

Total 2/

Credit Cards

ACD 3/ 4/

Personal

Payroll

January USD

MXN 5/

January

16

November

National Goods and Services


85

90

95

100

105

110

115

120

20

07

20

08

20

09

20

10

20

11

20

12

20

13

20

14

20

15

20

16

20

17

80

85

90

95

100

105

110

115

120

20

07

20

08

20

09

20

10

20

11

20

12

20

13

20

14

20

15

20

16

In 4Q 2016 and in January 2017, labor market conditions kept improving.

3.0

3.5

4.0

4.5

5.0

5.5

6.0

6.5

20

07

20

08

20

09

20

10

20

11

20

12

20

13

20

14

20

15

20

16

20

17

January

IMSS-Insured Jobs, Employed Populationand Total IGAE

Index 2012=100, s. a.

National Unemployment Rate% of EAP, s. a.

Real Total Wage BillIndex Q1-2008 =100, s. a.

s. a. / Seasonally adjusted data.1/ Permanent and temporary workers in urban areas. Seasonally adjusted byBanco de México.Source: Calculated by Banco de México with data from IMSS and INEGI (SCNMand ENOE).

EAP / Economically Active Population.s. a. / Seasonally adjusted data.Source: National Employment Survey (Encuesta Nacional de Ocupación yEmpleo), INEGI.

s. a. / Seasonally adjusted data.Source: Elaborated by Banco de México with data from National EmploymentSurvey (Encuesta Nacional de Ocupación y Empleo), INEGI.

4Q-2016December

January

EmployedSalaried

Population

Real AverageIncome

RealWage Bill

4Q-2016

IMSS-affiliated Jobs 1/

EmployedPopulation

TotalIGAE


18

In turn, gross fixed investment remained stagnant.

60

70

80

90

100

110

120

130

140

150

160

170

200

7

200

8

200

9

201

0

201

1

201

2

201

3

201

4

201

5

201

6

80

85

90

95

100

105

110

20

08

20

09

20

10

20

11

20

12

20

13

20

14

20

15

20

16

Investment and its ComponentsIndex 2008=100, s. a.

Residential and Non-ResidentialConstruction Investment

Index 2008=100, s. a.

Real Value of Production in the Construction Industry by Contracting Institutional Sector

Index January 2008=100, s. a.



s. a. / Seasonally adjusted data. For private and public construction, the seasonaladjustment was elaborated by Banco de México with data from INEGI.Source: ENEC, INEGI.


November

Construction

Imported Machineryand Equipment

Total

National Machineryand Equipment Non-Residential

Residential

November40

60

80

100

120

140

20

08

20

09

20

10

20

11

20

12

20

13

20

14

20

15

20

16

December

Total

Public

Private

-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

As a result of the recent evolution of economic activity, no aggregate demand-relatedpressures onto prices have been observed.

Output Gap 1/

% 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, calculatedwith an unobserved components method.Source: Calculated by Banco de México with data from INEGI.

GDP

IGAE

December4Q-2016


87

92

97

102

107

112

20

08

20

10

20

12

20

14

20

16

80

85

90

95

100

105

20

08

20

10

20

12

20

14

20

16


The improvement in the labor market has translated into higher unit labor costs, eventhough these remain at lower levels with respect to those observed prior to the globalfinancial crisis.

Total Manufacturing

s. a. / Seasonally adjusted and trend series. The former is represented with a solid line, the latter, with a dotted line. Trendsestimated by Banco de México.Source: Unit cost prepared by Banco de México based on data from INEGI. The Global Index of Labor Productivity in theEconomy (IGPLE), as released by INEGI.

s. a. / Seasonally adjusted and trend series. The former is represented with a solid line, the latter, with a dotted line.Source: Prepared by Banco de México with seasonally adjusted data from the Monthly Manufacturing Business Survey andthe Indicator of Industrial Activity of the Mexico’s System of National Accounts, INEGI.

Productivity and Unit Labor CostIndex 2008=100, s. a.

3Q-2016

Productivity Productivity

Unit labor costs Unit labor

costs

December

Outline


Monetary Policy1





1

2

3

4

5

6

7

8

9

10

11

12

13

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

20

17

During 4Q 2016, the slightly upward trend in inflation persisted. Then in January, this trend intensified after theimpact of the adjustment in some energy prices.

Consumer Price Index Annual % change

Source: Banco de México and INEGI.

Headline

CoreVariability Interval

Non-Core


1F-Feb

0

1

2

3

4

5

6

7

8

9

10

20

08

20

09

20

10

20

11

20

12

20

13

20

14

20

15

20

16

20

17

0

1

2

3

4

5

6

7

8

9

10

20

08

20

09

20

10

20

11

20

12

20

13

20

14

20

15

20

16

20

17

The depreciation of the Mexican peso in 4Q 2016 was reflected in the adjustment of relativeprices of merchandise with respect to services, contributing to the upward trend in core inflation.

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

Merchandise

Core Price IndexAnnual % change

Merchandise and Services

1F-Feb

Merchandise

Food

ServicesNon-food

1F-Feb



During 4Q 2016, the non-core component increased, due to higher prices of some agricultural products andto higher gasoline prices at the Northern border. In January, it was further affected by the increments inenergy prices.

-15

-12

-9

-6

-3

0

3

6

9

12

15

18

21

24

27

30

20

09

20

10

20

11

20

12

20

13

20

14

20

15

20

16

20

17

Agriculture

-3

0

3

6

9

12

15

18

20

09

20

10

20

11

20

12

20

13

20

14

20

15

20

16

20

17

Energy and Government Approved Fares


Non-Core IndexAnnual % change

Fruits and Vegetables

1F-Feb1F-Feb

Agriculture

Livestock

Government Approved Fares

Energy and GovernmentApproved Fares

Energy


At the beginning of the year, the measures aimed to liberalize some energy prices strongly affectedthe CPI.

Consumer Price IndexAnnual incidences in percentage points 1/

1/ Incidence refers to the contribution of each component of the CPI on percentage points to thegeneral inflation. In some cases the sum of the respective components may have some discrepancydue to rounding effects.Source: Elaborated by Banco de México with data from INEGI.

-1

0

1

2

3

4

5

6

7

8

20

14

20

15

20

16

20

17

1F-Feb

CoreNon-core without gasoline

Gasoline

Headline

It should be pointed out that:

Even though the impact of the liberalization of energyprices onto inflation in the short term was significant,it is expected to be transitory.

This measure represents progress in strengtheningthe macroeconomic fundamentals of the country, as itreduces the vulnerabilities it represents for publicfinances, given that maintaining public pricesmisaligned to their international reference is notsustainable.

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

9.5

Dec

-15

Feb

-16

Ap

r-1

6

Jun

-16

Au

g-1

6

Oct

-16

Jan

-17

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

9.5

Dec

-14

Feb

-15

Ap

r-1

5

Jul-

15

Sep

-15

No

v-1

5

Jan

-16

Ap

r-1

6

Jun

-16

Au

g-1

6

No

v-1

6

Jan

-17


End of 2017 End of 2018 Long Term: Headline Inflation

Source: Banco de México. Source: Banco de México.

26

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. For the current Report, the estimate was updated by including dataas of December 2015.Source: Banco de México and Citibanamex survey.

Headline

Core

Non-core

Headline

Core

Non-core

1.5

2.0

2.5

3.0

3.5

4.0

4.5

Jan

-10

Au

g-1

0

Mar

-11

Oct

-11

May

-12

Dec

-12

Jul-

13

Feb

-14

Sep

-14

Ap

r-1

5

No

v-1

5

Jun

-16

Jan

-17

Banco de México Next 5-8 years

CitibanamexNext 3-8 years

Variability Interval

January

In this context, and in view of the temporary shocks that are expected to affect inflation this year, inflationexpectations increased across all terms, even though they fundamentally still reflect a transitory increment ininflation, as medium- and long-term expectations increased to a much lesser extent as compared to short-termones.

Market Instruments 1/

Inflation ExpectationsMedian, %

JanuaryJanuaryFebruary


3.80

2

2.5

3

3.5

4

4.5

5

5.5

6

Jul-

16

Oct

-16

Jan

-17

Ap

r-1

7

Jul-

17

Oct

-17

Jan

-18

Ap

r-1

8


Monthly Inflation Expectations for 2017Median, %

Annual Inflation Expectations%

-0.5

0.0

0.5

1.0

1.5

2.0

Jan

-17

Feb

-17

Mar

-17

Ap

r-1

7

May

-17

Jun

-17

Jul-

17

Au

g-1

7

Sep

-17

Oct

-17

No

v-1

7

Dec

-17

Jan

-18

Dec

-18

October SurveyNovember SurveyDecember SurveyJanuary Survey

Observed

End 2018

Since February, the evolution of the monthly expected inflation derived from surveys did not change after theshock in January, and, therefore, the implicit annual inflation expected for January 2018 presents a significantdownward adjustment.

September SurveyOctober SurveyNovember SurveyDecember SurveyJanuary Survey

Observed

12.0

13.0

14.0

15.0

16.0

17.0

18.0

19.0

20.0

21.0

22.0

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

Jul-

16

Oct

-16

Jan

-17

4

7

9

12

14

17

19

22

24

27

29

Feb

-14

May

-14

Au

g-1

4

No

v-1

4

Feb

-15

May

-15

Au

g-1

5

No

v-1

5

Feb

-16

May

-16

Au

g-1

6

No

v-1

6

Feb

-17

In light of the outcome of the U.S. elections and the risk of adjustments in the Mexico-U.S. relations, theexchange rate and its volatility went up, while more recently the Mexican peso has considerably appreciated.To this development, monetary policy actions have contributed significantly, as well as the measuresannounced by the Foreign Exchange Commission.

Nominal Exchange 1/

Pesos per USDImplied Volatility in Exchange Rate Options 2/

%

1/ Refers to FIX Exchange rate.Source: Banco de México.

2/ Currency option implied volatility refers to one-month options.Source: Bloomberg.

Observed Exchange Rate (last data 28-Feb) 20.00

February February

Depreciation


3

4

5

6

7

8

Jan

-16

Feb

-16

Mar

-16

Ap

r-1

6

May

-16

Jun

-16

Jul-

16

Au

g-1

6

Sep

-16

Oct

-16

No

v-1

6

Dec

-16

Jan

-17

Feb

-17

Government Bond Interest Rates%

Yield Curve%

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

February

1 day

3 months

2 years

1 year

5 years

10 years

In turn, interest rates across all terms went up, although there has recently been a reversal.Furthermore, the slope of the yield curve diminished during this period.


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

Jun 30, 2016

Dec 30, 2016

Feb 28, 2017

Sep 30, 2016

2.5

3.0

3.5

4.0

4.5

5.0

5.5

6.0

6.5

Jan

-16

Feb

-16

Mar

-16

Ap

r-1

6

May

-16

Jun

-16

Jul-

16

Au

g-1

6

Sep

-16

Oct

-16

No

v-1

6

Dec

-16

Jan

-17

Feb

-17

Spreads Curve

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

Source: Proveedor Integral de Precios (PiP) and U.S. Treasury Department.

1 day

3 months

2 years

1 year

5 years10 years

February

Mexico and U.S. interest rate spreads have been increasing, given that interest rates in the U.S.increased to a lesser extent. It is noteworthy that during this period the spread curve reversed.


Mexico and United States Interest Rate Spreads 1/

%

3.0

3.5

4.0

4.5

5.0

5.5

6.0

6.5

7.0

1 1 3 6 1 2 3 5 10 20 30

months yearsday

Jun 30, 2016

Dec 30, 2016

Sep 30, 2016

Feb 28, 2017

Outline


Monetary Policy1





-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 Q2 Q4

2018Q4


Fan Chart: Output Gap% of potential output, s. a.

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

Economic Activity Outlook

2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

Current Account Deficit

(% of GDP)

Report Previous Revised

2017 3.0 2.7

2018 3.0 2.7

Increase in the Number of IMSS-insured jobs

(Thousands)


2017 600 - 700 580 – 680

2018 650 - 750 620 – 720

GDP Growth

(%)


2017 1.5 – 2.5 1.3 – 2.3

2018 2.2 - 3.2 1.7 – 2.7

2016Q4

2017 Q4

That the implementation of structural reforms would render greater-than-expected results.

Risks to the Growth Outlook

Upward:

That, given the recent depreciation of the exchange rate, non-oil exports would present a morenotorious reactivation.

That the implementation of the expansionary fiscal policy in the U.S. would have a net positiveimpact on the Mexican industrial production and on the transfer of workers’ remittances to thecountry.

That the forthcoming negotiations of the Free Trade Agreement with the U.S. would reach afavorable outcome.


Downward:

That different enterprises would decide to cancel or postpone their investment plans in light of therecent events in the U.S.

That a highly protectionist trade or fiscal policy would be implemented in the U.S., leading to afurther deterioration of consumers’ and businesses’ confidence.

Risks to the Growth Outlook

That the rating agencies would reduce the credit rating of the country, affecting investment flowsto Mexico.

That workers’ remittances to Mexico would be lower than expected, possibly as a consequence ofthe policies impeding their transfers or of a lower level of employment among Mexicans in the U.S.

That episodes of high volatility in international financial markets would be observed.


Inflation Outlook

Core inflation

20

17

• It is estimated to lie above theupper limit of the variabilityinterval, while it is expected toresume its tendency of convergencetowards its target during the lastmonths of this year.


Headline inflation

• They are expected to lie around 3 percent at the end of the year.

• It is expected to persist at levelsabove the permanent 3 percenttarget, although it is estimated toresume its trend of convergencetowards its target at the end of thisyear.

20

18

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

T2 T4 T2 T4 T2 T4 T2 T4 T2 T4 T2 T4 T2 T4 T2 T4 T2 T4 T2 T4 T2 T4 T2 T4 T2 T4

Observed

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

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

Q2Q4Q2Q4Q2Q4Q2Q4Q2Q4Q2Q4Q2Q4Q2Q4Q2Q4Q2Q4Q2Q4Q2Q4Q2Q4

Observed

Headline Inflation Target


Annual Headline Inflation 1/

Annual % variationAnnual Core Inflation 2/

Annual % variation

1/ Quarterly average of annual headline inflation.Source: Banco de México and INEGI.

2/ Quarterly average of annual core inflation.Source: Banco de México and INEGI.

Fan Charts

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018


2016 Q4

2018 Q4

2017 Q4

2016 Q4

2018 Q4

2017 Q4

Thus, during this year inflation is expected to be temporarily affected both by changes in the relative prices ofmerchandise with respect to services, as a result of the depreciation of the real exchange rate, and by thetransitory impact of gasoline prices liberalization.

Q2 Q4 Q2 Q4 Q2 Q4 Q2 Q4 Q2 Q4 Q2 Q4 Q2 Q4 Q2 Q4 Q2 Q4 Q2 Q4 Q2 Q4 Q2 Q4 Q2 Q42006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

Downward Upward

That the number of shocks that have taken placewould increase the probability of second roundeffects onto inflation.

37

The possibility that the national currencycontinues appreciating.


Risks to the Inflation Outlook

Further reductions in different prices of theeconomy, as a consequence of structuralreforms.

That inflation expectations would rise evenfurther as a consequence of a furtherdepreciation of the national currency, or that,given the already observed depreciation, its pass-through onto prices would increase.

Higher prices of agricultural goods, even thoughtheir impact onto inflation would tend to betransitory.

That the future performance of the internationalreference prices and a higher competition amonggasoline and other fuels’ suppliers in the countrywould lead to lower prices of these products.

That the national economy would deceleratemore than estimated.


The monetary authority at all times considers that its actions affect the price formation process ofthe economy with a certain lag.

Monetary Policy Stance

In this sense, trying to offset, in the very short term, the shocks that temporarily affect inflationby adjusting the reference rate, would be inefficient and costly in terms of economic activity.

However, through its actions, the Central Bank seeks to prevent the various supply shockspreviously mentioned from contaminating the price formation process in the economy.

Thus, this Central Institute will monitor that the referred increments in the reference rate and thosethat could be required in 2017 should be reflected in the dynamics of future inflation.

This will be done considering that the main challenge faced by the Board of Governors in the futureis to prevent second round effects onto inflation and to maintain medium- and long-terminflation expectations anchored.


Monetary Policy Stance

The Board of Governors will closely monitor the evolution of all inflation determinants and itsmedium- and long-term expectations.

→ This will be done in order to be able to continue taking the necessary measures to consolidate theefficient convergence of inflation to its 3.0 percent target.

Especially, the potential pass-through of exchange rate adjustments and gasoline prices onto therest of the prices.

The monetary position of Mexico relative to that of the U.S.

The evolution of the output gap.

40

Strengthening Confidence in the Mexican Economy


Mexico should continue boosting its competitiveness in the international arena and enhanceits growth potential in the domestic market.

In this sense, the commitment to adequately implement the approved structural reforms and in a timelymanner, and to continue with fiscal consolidation efforts should be a priority. The strengthening of boththe microeconomic functioning of the economy and its macroeconomic soundness will allow Mexico tobecome a more attractive investment destination.

Moreover, it is imperative to strengthen the rule of law and to guarantee legal certainty so asto propitiate a more favorable environment for growth. This has gained even more relevancein the current juncture.

It is also mandatory to seek greater diversification of both destination markets for Mexicanexports and the sources of foreign direct investment and imports to the country.

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