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Quarterly Report
November 22nd, 2017
July – September 2017
Outline
1Quarterly Report July - September 2017
Monetary Policy and Inflation1
External Conditions2
Forecasts and Final Remarks4
Evolution of the Mexican Economy3
Quarterly Report July - September 2017
Conduction of Monetary Policy
2
Since late 2015, Banco de México has taken the measures required to ensure that, in light of theshocks that affected inflation, adjustments in the relative prices would take place in an orderlymanner, preventing second round effects on the price formation process in the economy.
The Board of Governors has considered that the monetary policy measures affect inflation with a lag viadifferent transmission channels. These channels have been fully operating during 2017. In particular, themonetary policy actions have contributed to the following:
Anchoring of inflation expectations.
Lower growth of financing.
Considerable appreciation of the national currency against the U.S. dollar, from mid-January until the end ofSeptember 2017, although recently the Mexican peso has experienced volatility.
Derived from the above, inflation has attained its maximum level and has begun a downwardtrend.
Quarterly Report July - September 2017 3
Conduction of Monetary Policy
The Board of Governors considered that, despite theincrease in some risks, the adopted monetary policy stanceremained congruent with the convergence of headlineinflation to the 3.0 percent target by the end of 2018.September, 2017
November, 2017
Unchanged at 7.0 percent
August, 2017
In light of the persisting risks, Banco de México will remain vigilant to ensure a prudentmonetary stance, so that the anchoring of medium- and long-term inflation expectationsprevails and inflation converges to its target.
2
3
4
5
6
7
8
9
10
20
07
20
08
20
09
20
10
20
11
20
12
20
13
20
14
20
15
20
16
20
17
Quarterly Report July - September 2017 4
Thus, the adopted monetary policy stance led the annual headline inflation to attain a maximum in August 2017.
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.
Target for the OvernightInterbank Interest Rate 1/
November
Headline Inflation
Core InflationOctober
Headline Inflation Target
Quarterly Report July - September 2017 5
Ex-ante real interest rates have increased to levels above 3.0 percent.
-2
0
2
4
6
8
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
Mar
-17
May
-17
Jul-
17
Sep
-17
No
v-1
7
Short-Term Ex-Ante Real Rate and Estimated Ranges for the Short-Term Neutral Real Ratein the Short and Long Terms 1/
%
1/ The short-term ex-ante real rate is constructed using the Target for the Overnight Interbank Interest Rate and 12-month inflation expectations from Banco de México Survey. The dotted lines correspondto the midpoints of each range.Source: Banco de México.
Short-Term Ex-Ante Real Rate
Short-Term Neutral Real Rate Range in the Short-Term
November
Short-Term Neutral Real Rate Range in the Long-Term
Quarterly Report July - September 2017 6
The change in the inflation trend has been a result, in addition to the implemented monetarystance, of the partial fading of adjustments in relative prices, derived from the sequence of shocksthat had affected it.
Consumer Price Index Annual % change
Source: Banco de México and INEGI.
0
1
2
3
4
5
6
7
8
9
10
11
12
13
20
07
20
08
20
09
20
10
20
11
20
12
20
13
20
14
20
15
20
16
20
17
Headline
CoreVariability Interval
Non-core
October
Aug-17:6.66%
-6
-3
0
3
6
9
12
15
18
21
20
10
20
11
20
12
20
13
20
14
20
15
20
16
20
17
0
1
2
3
4
5
6
7
20
10
20
11
20
12
20
13
20
14
20
15
20
16
20
17
Quarterly Report July - September 2017 7
The change in the inflation trajectory is appreciated in more detail when differentindicators are analyzed.
Percentage of CPI Basket according to Intervals of Monthly Annualized Increment 1/
%, s. a.
Annualized Seasonally Adjusted Monthly Change and Trend
%, s. a.
CPI and Trimmed Mean Indicator 2/
Annual % change
s. a. / Seasonally adjusted data.1/ 3-month moving average.Source: Banco de México and INEGI
s. a. / Seasonally adjusted data.Source: Seasonal adjustment prepared by Banco de México with own data and datafrom INEGI.
2/ The Trimmed Mean Indicator excludes the contribution of extreme variations inthe prices of some generic items from the inflation of a price index. To eliminate theeffect of these changes, the following is done: i) monthly seasonally adjustedchanges of the generic items of the price index are arranged from the smallest to thelargest value; ii) generic items with the biggest and the smallest variation areexcluded, considering in each distribution tail up to 10 percent of the price indexbasket, respectively; and iii) using the remaining generic items, which byconstruction lie closer to the center of the distribution, the Trimmed Mean Indicatoris calculated.Source: Prepared by Banco de México with own data and data from INEGI.
1Q-Agosto
6-Month Moving Average
Annualized Monthly Change
Headline Inflation Target October
Headline Inflation
Annual Inflation 6.37
Trimmed Mean Indicator4.70
Headline Inflation Target
October
0
10
20
30
40
50
60
70
80
90
100
201
0
201
1
201
2
201
3
201
4
201
5
201
6
201
7
Over 4%
Between 2 and 4%
Below 2%
Smaller or equal to 3%
October
0
1
2
3
4
5
6
7
20
10
20
11
20
12
20
13
20
14
20
15
20
16
20
17
-6
-3
0
3
6
9
12
15
18
21
20
10
20
11
20
12
20
13
20
14
20
15
20
16
20
17
Quarterly Report July - September 2017 8
1Q-Agosto October
Core Inflation
Annual Inflation 4.77
Trimmed Mean Indicator4.49
Headline Inflation Target
October
s. a. / Seasonally adjusted data.1/ 3-month moving average.Source: Banco de México and INEGI
Percentage of CPI Basket according to Intervals of Monthly Annualized Increment 1/
%, s. a.
Annualized Seasonally Adjusted Monthly Change and Trend
%, s. a.
Core CPI and Trimmed Mean Indicator 2/
Annual % change
This change in the trajectory is also observed in core inflation.
2/ The Trimmed Mean Indicator excludes the contribution of extreme variations inthe prices of some generic items from the inflation of a price index. To eliminate theeffect of these changes, the following is done: i) monthly seasonally adjustedchanges of the generic items of the price index are arranged from the smallest to thelargest value; ii) generic items with the biggest and the smallest variation areexcluded, considering in each distribution tail up to 10 percent of the price indexbasket, respectively; and iii) using the remaining generic items, which byconstruction lie closer to the center of the distribution, the Trimmed Mean Indicatoris calculated.Source: Prepared by Banco de México with own data and data from INEGI.
s. a. / Seasonally adjusted data.Source: Seasonal adjustment prepared by Banco de México with own data and datafrom INEGI.
0
10
20
30
40
50
60
70
80
90
100
201
0
201
1
201
2
201
3
201
4
201
5
201
6
201
7
Over 4%Between 2 and 4%Below 2%Smaller or equal to 3%
October
6-Month Moving Average
Annualized Monthly Change
Headline Inflation Target
Quarterly Report July - September 2017 9
One of the factors that has contributed the most to lower inflation levels has been the change in the corecomponent trend since August. This is largely explained by merchandise prices.
0
1
2
3
4
5
6
7
8
9
10
20
09
20
10
20
11
20
12
20
13
20
14
20
15
20
16
20
17
Merchandise and Services
0
1
2
3
4
5
6
7
8
9
10
11
20
09
20
10
20
11
20
12
20
13
20
14
20
15
20
16
20
17
Merchandise
Source: Banco de México and INEGI. Source: Banco de México and INEGI.
October
Merchandise
Food
Services Non-food
October
Core Price IndexAnnual % change
-120
-60
0
60
120
180
240
300
-20
-10
0
10
20
30
40
50
20
12
20
13
20
14
20
15
20
16
20
17
-20
-15
-10
-5
0
5
10
15
20
25
30
35
40
20
12
20
13
20
14
20
15
20
16
20
17
Quarterly Report July - September 2017 10
Non-core Price IndexAnnual % change
Price Index of Selected Fruit and Vegetables Annual % change
Source: Banco de México and INEGI. Source: Banco de México and INEGI.
LP Gas
Natural Gas
Gasoline
Energy Products
Non-core inflation remains at high levels, which has limited the speed of the decrease of headline inflation. Thisis attributed to higher prices of some agricultural products, as well as a spike in energy prices since September,in particular the LP gas prices.
OctoberOctober
Fruit and Vegetables
Onion
Potato and Other Tubers
Tomato
Price Indices of Selected Energy ProductsAnnual % change
Source: Banco de México and INEGI.
-12
-9
-6
-3
0
3
6
9
12
15
18
21
20
12
20
13
20
14
20
15
20
16
20
17
October
Non-core
Agriculture
Energy and GovernmentApproved Fares
11
Inflation expectations corresponding to the end of 2018 are considerably lower than those of 2017.Meanwhile, longer-term expectations remained anchored around 3.5 percent.
Annual Headline Inflation Expectations Median, %
Long-term Inflation ExpectationsMedian, %
Source: Banco de México Survey. 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.Source: Banco de México and Citibanamex Survey.
Quarterly Report July - September 2017 11
2.5
3.0
3.5
4.0
4.5
5.0
5.5
6.0
6.5
7.0
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
Mar
-17
May
-17
Jul-
17
Sep
-17
2017
2018
2019
1.5
2.0
2.5
3.0
3.5
4.0
4.5
Jan
-10
Jul-
10
Jan
-11
Jul-
11
Jan
-12
Jul-
12
Jan
-13
Jul-
13
Jan
-14
Jul-
14
Jan
-15
Jul-
15
Jan
-16
Jul-
16
Jan
-17
Jul-
17
Next 5-8 Years
Next 4 Years
Market Instruments 1/
Variability Interval
OctoberOctober
Next 3-8 Years
November
8
9
10
11
12
13
14
15
Jun
-17
Jul-
17
Au
g-1
7
Sep
-17
Oct
-17
No
v-1
7
12
The Mexican peso had a favorable performance during most of the quarter. However, since the end ofSeptember it depreciated and its volatility increased, mainly due to the NAFTA-related uncertainty, thenormalization process of the U.S. monetary policy and the possible approval of a fiscal plan in this country.
16
17
18
19
20
21
22
23
Jan
-16
Ap
r-1
6
Jul-
16
Oct
-16
Jan
-17
Ap
r-1
7
Jul-
17
Oct
-17
Nominal Exchange Rate 1/
Pesos per USDImplied Volatility in FX Options 2/
%
1/ Observed exchange rate refers to the daily FIX Exchange Rate. Expectations refer to the averageof Banco de México Survey from October.Source: Banco de México.
2/ It refers to implied volatility in one-month options.Source: Bloomberg.
Quarterly Report July - September 2017
Exchange Rate (Last Data Nov, 21) 18.82Analysts’ Expectation 2017 18.70Analysts’ Expectation 2018 18.61
Depreciation
November November
Quarterly Report July - September 2017 13
Since June, interest rates for all terms increased. Short-term ones rose moderately, while medium- and long-termones, particularly those for two years and longer, registered more considerable increments. As a result, the slopeof the yield curve got somewhat steeper, which could have been even steeper in the absence of the monetarypolicy actions.
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
Interest Rates%
Source: Banco de México and Proveedor Integral de Precios (PiP).
November
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
Mar 31, 2017
Nov 21, 2017
Dec 30, 2016
Jun 30, 2017
Mexico: Government Securities’ Holdings by Foreign Investors MXN billion
Quarterly Report July - September 2017 14
Since late June, short-term interest rate spreads between Mexico and the U.S. decreased, and medium- and long-term ones widened. In this context, government securities’ holdings by non-residents remained relatively stable. Itstands out that holdings of short-term instruments decreased, which was offset by the increment in medium- andlong-term ones.
2.5
3.0
3.5
4.0
4.5
5.0
5.5
6.0
6.5
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
Mexico and United States Interest Rate Spreads 1/
%
1/ The United States objective rate is the average of the interval considered by the Federal Reserve.Source: Banco de México, Proveedor Integral de Precios (PiP), and U.S. Treasury Department.
1 Day
3 Month
2 Year
1 Year
10 Year
November
2/ 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
08
20
09
20
10
20
11
20
12
20
13
20
14
20
15
20
16
20
17
Bonds
CETES
Total 2/
November
Outline
15Quarterly Report July - September 2017
Monetary Policy and Inflation1
External Conditions2
Forecasts and Final Remarks4
Evolution of the Mexican Economy3
20
06
20
07
20
08
20
09
20
10
20
11
20
12
20
13
20
14
20
15
20
16
20
17
-2
0
2
4
6
8
10
Quarterly Report July - September 2017 16
World headline inflation increased slightly across most Advanced Economies (AEs), as aconsequence of higher energy and food prices. However, inflation persists below the respectivecentral banks’ target.
Headline InflationAnnual % change
Commodity Price Index 1/
Index 2016=100
Note: The sample of countries used for the calculation represents the 83.2% of world GDP, measured bythe purchasing power parity.Source: Elaborated by Banco de México with data from Haver Analytics and IMF.
1/ It refers to the Thomson Reuters Commodity Index.Source: Bloomberg.
World
Advanced
Emerging
70
80
90
100
110
120
130
140
150
160
170
180
20
14
20
15
20
16
20
17
Total
Energy
Food
Metals
NovemberSeptember
Quarterly Report July - September 2017 17
Inflation and Unemployment Gaps%
Personal Consumption Expenditures Price Index and Inflation Expectations
Annual % change
-1.5
-1.0
-0.5
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
4.0
20
11
20
12
20
13
20
14
20
15
20
16
20
17
0.0
0.5
1.0
1.5
2.0
2.5
3.0
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
Mar
-17
May
-17
Jul-
17
Sep
-17
No
v-1
7
In the U.S., economic activity continued registering a solid growth during Q3 2017. Thisenvironment kept reflecting in a continuous strengthening of the labor market. Nevertheless,inflation has persisted below 2 percent.
United States
1/ Expected inflation over the five-year period that begins five years from today. Obtained fromswap contracts in which one counterparty agrees to pay a fixed rate in exchange for receiving areferenced payment at an inflation rate over a specified period.Source: Bloomberg and Bureau of Economic Analysis.
Note: Inflation gap refers to the PCE core component and is relative to the Federal Reserve 2%objective. Unemployment gap is relative to the natural rate of unemployment estimated by theCBO.Source: U.S. Department of Labor, Bureau of Labor Statistics; Congressional Budget Office (CBO).
SeptemberNovember
Inflation Expectations 1/
PCE: Headline
PCE: Core
October
Inflation Gap
Natural Rate of Unemployment Gap
September
-0.5
0.0
0.5
1.0
1.5
2.0
Ap
r-1
4
Au
g-1
4
Dec
-14
Ap
r-1
5
Au
g-1
5
Dec
-15
Ap
r-1
6
Au
g-1
6
Dec
-16
Ap
r-1
7
Au
g-1
7
Dec
-17
Ap
r-1
8
Au
g-1
8
Dec
-18
Ap
r-1
9
Au
g-1
9
Dec
-19
4,4
59
4,4
23
4,0
06
3,4
89
3,0
69
3,8
73
5,3
81
5,6
51
5,6
51
5,6
51
4,1
08
4,7
29
5,1
31
5,4
62
5,6
89
0
2,000
4,000
6,000
8,000
10,000
12,000
14,000
16,000
18,000
20
07
20
08
20
09
20
10
20
11
20
12
20
13
20
14
20
15
20
16
20
17
20
18
20
19
20
20
Expected Monetary Policy Rates Implicit in OIS Curve 1/
%
Quarterly Report July - September 2017 18
The central banks of the main AEs kept their accommodative monetary stance, even though someof them continued or started a gradual normalization process. In the future, it is still expected thatthese policies remain loose.
Aggregate Balance of Central Banks at the End of each Year
Billions of dollars
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 the lower and upper bounds of the range(1.00% - 1.25%).Source: Banco de México with data from Bloomberg.
Note: For the Federal Reserve, it is projected that the reduction in the balance sheet started in October 2017 at thepace announced by the Federal Reserve. For the ECB it is projected what was announced by the central bank in itsOctober meeting (the pace of purchasing is maintained in 60 billions of dollars until December, and from January toSeptember 2018 the monthly pace decreases to 30 billions of dollars), furthermore, it is anticipated that the assetpurchasing program ends in October 2018 and that the reinvestment of maturities for the following two years ismaintained. For Japan, it is anticipated that the central bank maintains its current policy of balance expansion during2018, to later increase it to a more gradual pace. For the Bank of England, no changes in the size of the balance areassumed. The data is converted to dollars with the current exchange rate.Source: Bloomberg with estimates of JPMorgan and Banco de México.
Federal Reserve
European Central BankBank of England
Bank of Japan
Forecast
Advanced Economies
Federal Reserve 2/
ECB Main Refinancing Operations
Bank of England
Bank of Japan
ECB Deposit Facility
Implied target rate in OIS curveJune 30, 2017
End of 2017 End of 2018 End of 2019
Implied target rate in OIS curveNovember 21, 2017
Outline
19Quarterly Report July - September 2017
Monetary Policy and Inflation1
External Conditions2
Forecasts and Final Remarks4
Evolution of the Mexican Economy3
85
90
95
100
105
110
115
120
125
130
90
95
100
105
110
115
120
20
12
20
13
20
14
20
15
20
16
20
17
-0.2
0
20
12
20
13
20
14
20
15
20
16
20
17
-1
-0.5
0
0.5
1
1.5
2
Quarterly Report July - September 2017 20
In Q3 2017, Mexican economic activity contracted, reflecting both the deceleration of someaggregate demand components, and the negative, albeit transitory, effects, resulting from theearthquakes and by a sharp drop in crude oil production during September.
Gross Domestic ProductQuarterly % change, s. a.
Indicators of Economic Activity Index 2013=100, s. a.
s. a. / Seasonally adjusted data.1/ It refers to the preliminary estimation published by INEGI.Source: Mexico’s System of National Accounts, INEGI.
3Q-20171/
IGAEServices
IGAETotal
Industrial Production
IGAEAgricultural
SeptemberAugust
s. a. / Seasonally adjusted data.Source: Mexico’s System of National Accounts, INEGI.
90
95
100
105
110
115
120
125
130
135
20
12
20
13
20
14
20
15
20
16
20
17
Quarterly Report July - September 2017 21
According to preliminary data published by INEGI, tertiary activities contracted in Q3 2017, whileindustrial activity remained weak, with a notable drop in crude oil production platform.
IGAE: ServicesIndex 2013=100, s. a.
Industrial ActivityIndex 2013=100, s. a.
Crude Oil Production Platform Thousands of daily barrels, s. a.
s. a. / Seasonally adjusted data.Source: Mexico’s System of National Accounts, INEGI.
s. a. / Seasonally adjusted data.Source: Mexico’s System of National Accounts, INEGI.
s. a. / Seasonally adjusted data.1/ Data up to October 29,2017.Source: Seasonally adjusted by Banco de México with data from PEMEX.
August
Trade
Lodging and Food Preparation
Services
Recreation and Others
Transport and Mass Media
70
75
80
85
90
95
100
105
110
115
20
12
20
13
20
14
20
15
20
16
20
17
Mining
Manufacturing
Construction
Electricity
September1,700
1,900
2,100
2,300
2,500
2,700
20
12
20
13
20
14
20
15
20
16
20
17
October 1/
80
90
100
110
120
130
140
20
12
20
13
20
14
20
15
20
16
20
17
Quarterly Report July - September 2017 22
Despite a continuous positive trend of external demand, a certain slowdown in private consumptionhas been observed, while the weakness of investment persisted.
Manufacturing ExportsIndex 2013=100, s. a.
Domestic Private ConsumptionIndex 2013=100, s. a.
Investment and its ComponentsIndex 2013=100, s. a.
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.
s. a. / Seasonally adjusted data.Source: Mexico’s System of National Accounts, INEGI.
s. a. / Seasonally adjusted data.Source: Mexico’s System of National Accounts, INEGI.
Total
Automotive
Rest
September93
100
107
114
121
20
12
20
13
20
14
20
15
20
16
20
17
Goods
Total
August
Services
90
95
100
105
110
115
120
125
130
135
140
20
12
20
13
20
14
20
15
20
16
20
17
August
Construction
Imported Machinery and Equipment
Total
National Machinery and Equipment
0
2
4
6
8
10
12
14
16
18
20
20
12
20
13
20
14
20
15
20
16
20
17
Quarterly Report July - September 2017 23
Growth of credit to the private sector has moderated.
Total Financing to the Non-financial Private Sector 1/
Real annual % changeHousehold Total Credit 4/
Real annual % change
1/ Real annual changes are calculated based on balances adjusted due to exchange rate variations.2/ Data of foreign financing for the third quarter of 2017 are preliminary.3/ These data are adjusted due to the withdrawal from and the incorporation of some financial intermediaries to the creditstatistics.Source: Banco de México
4/ These data are adjusted due to the withdrawal from and the incorporation of some financial intermediaries to thecredit statistics.Source: Banco de México.
-12
-8
-4
0
4
8
12
16
20
12
20
13
20
14
20
15
20
16
20
17
3Q-2017
Total
External 2/
Domestic 3/
Housing
Consumption
September
Households
Quarterly Report July - September 2017 24
The estimate of the output gap, derived from the change of the base year to measure GDP, suggests that it hasbeen slightly positive during some quarters, although not statistically different from zero. The contraction in theactivity in Q3 2017 implied that the output gap estimate decreased and reached negative levels close to zeroagain.
Output Gap 1/
% of potential output, s. a.
Note: Confidence interval of the output gap calculated with an unobserved components method.s. a. / Estimated with seasonally adjusted data.1/ Estimated using the Hodrick-Prescott (HP) filter with tail correction; see Banco de México Inflation Report, April- June 2009, p.69.2/ GDP figures as of the third quarter of 2017 correspond to the timely estimate released by INEGI. IGAE figure as of September of 2017 corresponds to the implicit data for that month congruent with thetimely GDP estimate.Source: Estimated by Banco de México with data from INEGI.
-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
GDP 2/
IGAE
September3Q-2017
Quarterly Report July - September 2017 25
Labor market conditions have been tightening, so it seems that this market has no slack. However, nosignificant wage pressures that could affect inflation are perceived so far.
Employment Gap and Informal Salaried Workers 1/
%, s. a.Productivity and Unit Labor Cost 2/
Index 2008 = 100, s. a.
s. a. / Calculated with seasonally adjusted data.1/ The shaded area represents the confidence interval, which corresponds to two average standard deviationsamong all estimates.Source: Banco de México.
s. a. / Seasonally adjusted and trend series. The former is represented with a solid line, the latter, with adotted line.2/ Productivity based on worked hours. Series base year 2013 of Mexico’s System of National Accounts.3/ Data for 3Q-2017 estimated by Banco de México from the timely GDP estimate released by INEGI.Source: Estimated by Banco de México with data from INEGI.
-3
-2
-1
0
1
2
3
4
20
03
20
05
20
07
20
09
20
11
20
13
20
15
20
17
September80
84
88
92
96
100
104
108
20
06
20
07
20
08
20
09
20
10
20
11
20
12
20
13
20
14
20
15
20
16
20
17
3Q-2017 3/
Unit Labor Cost
Productivity
26Quarterly Report July - September 2017
Outline
Monetary Policy and Inflation1
External Conditions2
Forecasts and Final Remarks4
Evolution of the Mexican Economy3
-4
-3
-2
-1
0
1
2
3
4
-4
-3
-2
-1
0
1
2
3
4
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 July - September 2017 27
Fan Chart: Output Gap Estimate% of potential output, s. a.
s. a. / Seasonally adjusted data.Source: Banco de México.
Economic Activity Outlook
2013 2014 2015 2016 2017 2018 2019
Increase in the Number of IMSS-insured Jobs
(Thousands)
Report Previous Current
2017 660 – 760 720 – 790
2018 670 – 770 680 – 780
2019 - 690 – 790
GDP Growth
(%)
Report Previous Current
2017 2.0 – 2.5 1.8 – 2.3
2018 2.0 – 3.0 2.0 – 3.0
2019 - 2.2 – 3.2
Current Account Deficit
(% of GDP)
Report Previous Current
2017 2.2 1.7
2018 2.2 2.1
2019 - 2.3
2017 Q4 2018 Q4 2019 Q4
DownwardUpward
The renegotiation of NAFTA could trigger investment bothin new areas of opportunity and in those previouslyconsidered by the Agreement.
28Quarterly Report July - September 2017
Risks to Growth OutlookThe balance has a downward bias.
That the NAFTA renegotiation is not favorable.
The implementation of structural reforms could renderbetter-than-expected results.
The reconstruction effort associated to natural disastersin Mexico could generate a more positive effect oneconomic activity than estimated.
Due to uncertainty related to NAFTA, differentbusinesses could decide to postpone their investmentplans in Mexico even more.
Higher volatility in international financial markets and/orthe upcoming electoral process in Mexico could reducethe sources of financing and affect private spending.
Public insecurity could become a more relevant factor asa determinant of productive activity.
Central Scenario for Inflation
Core Inflation
20
17 • It is expected to present moderate
downward changes.
29Quarterly Report July - September 2017
Headline Inflation
• The downward trend is expected toaccentuate, leading to the convergenceto its 3.0 percent target by the end of2018.
• It is anticipated to remain above 4.0percent, although quite below theheadline inflation trajectory.
20
18 • It is estimated to reach levels
moderately above 3.0 percent at theend of 2018.
• It is estimated to fluctuate around the target.
20
19
→ These previsions consider the expectation of an orderly performance of the exchange rate, as well as aconsiderable reduction of non-core inflation over the following months and during 2018.
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 InflationCentral Scenario Previous ReportCentral Scenario Current ReportHeadline Inflation TargetVariability IntervalAnalysts' Expectations
Quarterly Report July - September 2017 30
Fan Chart: Annual Headline Inflation 1/
Annual % change
1/ Quarterly average of annual headline inflation.Source: Banco de México and INEGI.
2017 Q4 2018 Q4 2019 Q4
2013 2014 2015 2016 2017 2018 2019
The current scenario considers that the non-core component will reduce less than anticipated in the lastreport in the remainder of 2017 and over most of 2018. As a result, in 2018 annual headline inflation isestimated to reach its 3.0 percent target in Q4 2018, rather than in Q3 2018, as previously considered.
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
Variability Interval
Quarterly Report July - September 2017 31
Fan Chart: Annual Core Inflation 1/
Annual % change
1/ Quarterly average of annual core inflation.Source: Banco de México and INEGI.
2013 2014 2015 2016 2017 2018 2019
2017 Q4 2018 Q4 2019 Q4
Forecasts for core inflation in 2018 are slightly higher than previously considered, reflecting the impact of therecent reversal of the exchange rate on merchandise prices.
Downward Upward
The national currency could further depreciate, in view ofthe unfavorable outcome of the NAFTA or a negativereaction to monetary or fiscal policy actions in the U.S.
32
A favorable outcome of NAFTA negotiations could leadto an appreciation of the national currency.
Quarterly Report July - September 2017
Some agricultural goods’ prices could increase more thanestimated.
Significant upward pressures on some energy prices couldpersist.
The structural reforms could lead to further reductionsin different prices of the economy.
The economic activity could show a lower dynamismthan the one anticipated.
Potential increments in unit labor costs could affectinflation.
Risks to the Inflation OutlookThe balance with respect to the expected inflation trajectory has deteriorated and is biased upwards.
Quarterly Report July - September 2017 33
Monetary Policy Stance
In this context, and considering the described balance of risks, going forward, the Board ofGovernors will closely follow the evolution of all inflation determinants and its medium-and long-term expectations, especially:
→ In any event, in light of different persisting risks, the Board of Governors will be vigilant to ensure that aprudent monetary stance prevails, in order to strengthen the anchoring of medium- and long-terminflation expectations, and to achieve the inflation convergence to its target.
Future changes in the monetary policy position of Mexico relative to the U.S.
The potential pass-through of exchange rate adjustments onto prices.
The evolution of the output gap.
The performance of potential wage pressures.
34
Strengthening Confidence in the Mexican Economy
Higher growth of productivity is ultimately the only way to obtain a greater and sustainableexpansion of the economy, and, therefore, to increase salaries and to enhance the welfare ofthe population.
This is essential for the wages of all employed population, not only those who receive the minimumwage, to achieve a sustainable increase without generating inflation pressures, unemployment orgreater informality levels.
The current environment of public insecurity and the lack of the full observance of the rule oflaw undermine the necessary, but not sufficient conditions for economic growth, such as themacroeconomic stability or a better functioning of certain markets, from translating into higherinvestment and, above all, higher productivity.
Thus, the country should seek to implement more extensive reforms to provide legal certainty,to enhance the rule of law, to strengthen the institutions of the country and modify theincentives’ system that is faced by economic agents, so that it favors the creation of value ratherthan rent-seeking.
Quarterly Report July - September 2017