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MEXICO – Central Bank Inflation Report: More emphasis on inflation forecast targeting

February 28, 2018

Banxico began publishing forecast values of annual inflation for the next 8 quarters

The Central Bank of Mexico (Banxico) published the first quarterly inflation report of the year, with a greater emphasis on the role that inflation forecasts will play in the board’s decision framework. Back in August 2017, Banxico began publishing its expected trajectory for inflation (previously inferred from a fan chart, which associated shades of red to different probabilities for certain inflation levels). Today, Banxico took a further step in this direction by publishing the actual values of average annual inflation (headline and core) that it expects for the next 8 quarters, comparing them with the forecasts of their previous scenario (December Inflation Report). Importantly, during his presentation, Governor Díaz de León argued that any deviations from these forecasts will be important to determine future adjustments in monetary policy. However, he also clarified that such deviations would be thresholds (rather than triggers) as other information is also taken into account for rate decisions. We note that page 76 of the report features a box which explains this greater emphasis on “forecast targeting”, stating that it is aimed at increasing the public’s understanding of the board’s decision framework and strengthening the expectations transmission channel. The central bank also added that monetary policy affects prices with a lag between 4 and 6 quarters.  

The expected inflation trajectory is higher than in the previous scenario, but this does not add much new information relative to the latest monetary policy decision. In fact, February’s statement mentions that the board expects inflation to converge to the 3% target in 1Q19 in contrast with the statement of the previous monetary policy meeting (December) when board members said that inflation would decrease to 3% by the end of 2018. Also interestingly, the report presented a new core inflation measure – called “fundamental core inflation” – which only includes items of the CPI correlated with indicators of economic slack. According to the report, “fundamental core inflation” has been decreasing (currently standing at a lower level than the traditional core inflation measure), and will continue to be monitored to assess the inflation outlook. Additionally, we note that Banxico kept its GDP growth forecasts unchanged for both 2018 (2%-3%) and 2019 (2.2%-3.2%).  

As in the most recent monetary policy decision, the central bank put less emphasis on the Fed, indicating the board is not willing to react to the likely Fed’s rate hike in March. Governor Díaz de León said that the Fed actions will be evaluated on a case-by-case basis. 

In all, we see the report as consistent with our view that a pause in April is likely. Of course, given risks related to NAFTA, elections, and monetary policy in the U.S., further rate hikes cannot be ruled out. But the board, or at least most of its members, seems less willing to be so reactive to the Fed and the Mexican peso as before, focusing instead on the future path for inflation. The latest data (with inflation and activity surprising to the downside) also helps to build the case for a pause. 
 

Alexander Müller



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