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Quarterly Report

November 23, 2016

July - September 2016

Outline

2Quarterly Report July - September 2016

Monetary Policy1

Forecasts and Final Remarks5

External Conditions2

Inflation and its Determinants 4

Evolution of the Mexican Economy3

3

Conduction of Monetary Policy

Quarterly Report July - September 2016

The Mexican economy is one of the most integrated with the global economy, and, inparticular, with that of the U.S. Even if this has yielded considerable benefits, the domesticeconomy and financial markets have become more vulnerable to external events.

During the period covered by this Report, the Mexican economy faced a complex juncture.The outlook for the world economy became more challenging as a consequence of theelectoral process in the U.S. and its outcome, among other factors.

National financial markets were particularly hit by this events, registering a fall in assetprices and high volatility.

So far, the preemptive measures that Banco de México has adopted along this year haveprevented headline inflation and its expectations from being affected by the referred factors.


It is still difficult to identify the elements that will define the economic policy stance of the U.S.regarding its bilateral relation with Mexico starting from 2017.

The Mexican authorities will continue to act cautiously and keeping a medium and longer termperspective.

In the short run, they will continue to carefully monitor the evolution of national financial markets,so as to take the necessary measures to maintain its sound functioning, in a coordinated manner.

Mexico is in a strong position to face this new environment, as a result of:

Actual and expected achievements in terms of public finance consolidation.

Implementation of preemptive monetary policy measures during the year.

A well-capitalized, solvent, and adequately liquid financial system.

An unprecedented structural reform process.

Nonetheless, it is inevitable to continue handling actual and emerging risks by furtherstrengthening the macroeconomic fundamentals of the country.

5

Banco de México continued acting with full flexibility, and at the moment and extentrequired by the prevailing conditions, in order to offset inflationary pressures and tomaintain inflation expectations anchored.


August 11, 2016 Rate unchanged at 4.25 percent.

50 bp increment to 4.75 percent.September 29, 2016

50 bp increment to 5.25 percent.November 17, 2016

As volatility in financial markets in Mexico spiked, negatively affecting the dynamics ofthe national currency and, thus, endangering the anchoring of inflation expectations.

As the national economy faces an environment characterized by increased uncertaintyand a possibly permanent real shock, as well as to the deterioration of the balance ofrisks for inflation.

Monetary Policies Rates%

1/ Before January 20, 2008 it refers to the observed Overnight Interbank Interest Rate.2/ The upper limit of the target range is showed.Source: Federal Reserve and Banco de México.

0

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

U.S.: Target Federal Funds Rate 2/

Mexico: Target for the Overnight Interbank Interest Rate 1/

November


So far, in 2016 Banco de México has preemptively increased the Overnight Interbank InterestRate by 200 basis points, in view of an increasingly adverse external environment.

Outline


Monetary Policy1





8

External Conditions


The outlook for the world economy became more complex as a consequence of theelectoral process in the U.S. and its outcome, among other factors.

Despite some signs of a moderate recovery of the world economy in Q3 2016, the possibleimplementation of measures that could hamper foreign trade and foreign investment led toa deterioration in the balance of risks for the global growth.

This led to increased financial market volatility in all regions.

Capital inflows to emerging economies started to revert. Interest rates exhibited an upward trend, both in advanced and emerging

economies.

Quarterly Report July - September 2016 9

In Q3 2016, world economic activity recovered moderately, supported by greater growth inthe U.S. and other advanced economies, as well as by a continuous expansion of some of themain emerging economies.

0

2

4

6

8

20

10

20

11

20

12

20

13

20

14

20

15

20

16

20

17

GDP Growth ForecastsAnnual % change

-25

-20

-15

-10

-5

0

5

10

15

20

25

20

00

20

02

20

05

20

08

20

10

20

13

20

16

Trade of Goods 1/

Annual % change, s. a.

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

World Economy

August

ForecastsWEO OctoberWEO July

Advanced

World

Emerging


Change in Non-farm Payrolls and Unemployment Rate

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

Personal Consumption Expenditures Price Indexand Inflation Expectations

Annual % change

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

1/ Expected inflation over the five-year period that begins five years from today. Obtained from swap contracts in whichone counterparty agrees to pay a fixed rate in exchange for receiving a referenced payment at an inflation rate over aspecified period.Source: JP Morgan.

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

Change in Non-farm Payrolls

Unemployment Rate

October

United States

In the U.S., economic activity rebounded in Q3 2016. Although inflation remains low, inflationexpectations spiked, largely in response to the expectation of an expansionary fiscal policy that wouldbe, in principle, carried out by the incoming administration of the U.S.

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

Inflation Expectations 1/

PCE: Headline

PCE: Core

SeptemberNovember

11

In light of a higher expected inflation in the U.S., the markets’ perspective points to relatively faster and greaterincrements in the federal funds rate. Meanwhile, interest rates in the main advanced economies went up as ofOctober.

-0.7

-0.4

-0.1

0.2

0.5

0.7

1.0

1.3

1.6

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

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

Advanced Economies: Expected Monetary Policy Rates 1/

%

Advanced Economies: 10-Year Government Bond Interest Rates

%

United States: DXY and Trade-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 (0.25% - 0.5%).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 Deposit Facility

Bank of England

Bank of Japan

ECB Main Refinancing Operations

Dec.-16 Dec.-17

November

United States

Euro Zone

United Kingdom

Japan

Implied target rate in OIS curveNovember 7, 2016

Implied target rate in OIS curve November 22, 2016

97

100

103

106

109

112

115

Jan

-15

Ap

r-1

5

Jul-

15

Oct

-15

Jan

-16

Ap

r-1

6

Jul-

16

Oct

-16

DXY 3/

Trade-Weighted Index (TWI) 4/

November

15

25

35

45

55

65

75

85

95

105

115

125

20

10

20

11

20

12

20

13

20

14

20

15

20

16

20

17

20

18

Mexican Oil Mix

WTI

Futures 1/

International commodity prices presented a mixed performance during the periodanalyzed in this Report.

Crude Oil PricesUSD per barrel

Commodity PricesIndex 2005=100

1/ Data up to November 22, 2016.Source: Bloomberg. 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

Total

Energy

IndustrialMetals

Food

October


Currency Option Implied Volatility 1/

%Accumulated Capital Flows

(Debt and Equity) 2/

Billions of dollars

Nominal Exchange Rate against USD

Index 01-Jan-2015 = 100

1/ The minimum (maximum) value represents the lowest (highest) value inthe volatility of a sample with currencies from 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.

Volatility in international financial markets rebounded in all regions, mainly as a reflection of events related tothe electoral process in the U.S. Thus, capital inflows to emerging economies started to revert as of Novemberand their currencies depreciated.

-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

2014

2015

2011

2016 16-Nov.

90

100

110

120

130

140

150

160

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

Korea

Chile

Colombia

South Africa

Brazil

Mexico

November5

10

15

20

25

30

35

Jan

-15

Ap

r-1

5

Jul-

15

Oct

-15

Jan

-16

Ap

r-1

6

Jul-

16

Oct

-16

November

Maximum

Minimum

Mexico

Average

Emerging Markets

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

0.4 0

.70

.6 0.8

0.6

0.5 0.5

0.1

1.0

-5

-4

-3

-2

-1

0

1

2

3

4

200

8

200

9

201

0

201

1

201

2

201

3

201

4

201

5

201

6

In Q3 2016, the Mexican economy recovered moderately.

Quarterly % change, s. a. Annual % change

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

Q3 2016


2.2

3.1

1.6

-1.1

-5.2

-7.9

-4.6

-1.0

3.7

6.7

5.4

4.6

4.5

3.2

4.2 4.3 4

.94

.53

.2 3.6

1.0

1.8

1.6

1.1

2.3

1.8 2

.3 2.7 2.8

2.5 2

.82

.42

.3 2.6

2.0

-9

-6

-3

0

3

6

9

20

08

20

09

20

10

20

11

20

12

20

13

20

14

20

15

20

16

Gross Domestic Product

Q3 2016

70

80

90

100

110

120

130

140

150

20

08

20

09

20

10

20

11

20

12

20

13

20

14

20

15

20

16


This recovery reflected the reactivation shown by the services’ sector, while industrial production,overall, remained stagnant.

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

Industrial ActivityIndex 2008=100, s. a.

Global Indicator of Economic Activity: Services

Index 2008=100, s. a.


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


September

Transport and Mass Media

Financial and Real Estate

Leisure and Others

Trade

80

90

100

110

120

130

140

200

8

200

9

201

0

201

1

201

2

201

3

201

4

201

5

201

6

Mining

Manufacturing

Construction

Electricity

September70

80

90

100

110

120

130

140

150

160

170

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

Services

Total

Industrial

Agricultural

September

Total


In Q3 2016, manufacturing exports in Mexico recovered, after showing a negative trend throughout2015 and early 2016. Crude oil exports also increased.

Manufacturing ExportsIndex 2008=100, s. a.

Oil Exports and Crude Oil Export PlatformIndex 2008=100, s. a.

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.

s. a. / Seasonally adjusted data based on information in nominal dollars.1/ 3-month moving average of daily barrels of the seasonally adjusted series.Source: SAT, SE, Banco de México, INEGI. Merchandise Trade Balance, SNIEG. Information of NationalInterest, and Banco de México with data from PMI Comercio Internacional, S.A. de C.V.

70

80

90

100

110

120

130

140

150

160

170

20

07

20

08

20

09

20

10

20

11

20

12

20

13

20

14

20

15

20

16

20

30

40

50

60

70

80

90

100

110

120

130

140

150

20

07

20

08

20

09

20

10

20

11

20

12

20

13

20

14

20

15

20

16

Total

U.S.

Rest of the World

September

Oil Exports

Crude Oil Exports Platform 1/

September


The current account seems to have stabilized, reflecting, in part, that the non-oil trade balance has apparentlystarted to improve, after its deficit expanded from 2014 to 2015. Indeed, the accumulated deficit of thisbalance over the first three quarters of 2016, has been the lowest since 1996.

-4.0

-3.0

-2.0

-1.0

0.0

1.0

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

Q1

-20

16

Q2

-20

16

Q3

-20

16

-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

Total

Current Account 1/

% of GDP

Trade BalanceUSD millions

Non-oil Trade BalanceJanuary-September of each year,

USD millions

1/ Data for Q3 2016 correspond to Banco de México’s estimate.Source: Banco de México and INEGI.

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

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

Q3 2016

Oil

Non-Oil

Q3 2016-30,000

-25,000

-20,000

-15,000

-10,000

-5,000

0

5,000

19

93

19

95

19

97

19

99

20

01

20

03

20

05

20

07

20

09

20

11

20

13

20

15

Sep 2016

12.0

17.0

22.0

27.0

32.0

37.0

42.0

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

-10

0

10

20

30

40

50

20

12

20

13

20

14

20

15

20

16

90

95

100

105

110

115

120

125

20

08

20

09

20

10

20

11

20

12

20

13

20

14

20

15

20

16

19

Domestic Private Consumption 1/ and Commercial Retail Business Revenues

Index 2008=100; s. a.

Commercial Banks’ Consumer Performing Credit 2/

Real annual % change

Workers’ RemittancesUSD billions and

constant MXN billions; s. a.

s. a. / Seasonally adjusted data.1/ The Monthly Indicator of Private Consumption measures the performance ofspending by resident households in the country on consumer goods and services ofnational and external origin. It does not include net purchases in foreign markets andimported services.Source: EMEC and SCNM, INEGI.

2/ It includes Sofomes ER subsidiaries of bank institutions and financial groups.3/ It includes credit for payable leasing operations and other consumer credits.4/ 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.5/ It includes credit for movable property acquisition and auto loans.Source: Banco de México.

s. a. / Seasonally adjusted data.6/ Prices as of the second fortnight of December 2010.Source: Banco de México.


Retail Revenues

Private Consumption

August

Private consumption resumed its upward trajectory, consistent with the improvement in the real wage bill. Italso benefitted from the continued and rapid expansion of consumer credit, as well as from higher flows ofremittances.

Total 3/

Credit Cards

ACD 4/ 5/

Personal

Payroll

September

USD

Pesos 6/

September

20

During the reported quarter, weakness in gross fixed investment persisted.

60

70

80

90

100

110

120

130

140

150

160

20

07

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.

50

70

90

110

130

150

20

08

20

09

20

10

20

11

20

12

20

13

20

14

20

15

20

16

Real Value of Production in the Construction Industry by Contracting Institutional Sector 1/

Index January 2008=100, s. a.

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

s. a./ Seasonally adjusted data.1/ Seasonally adjusted by Banco de México, except the total.Source: Calculated by Banco de México with data from ENEC, INEGI.


August August

Construction

Imported Machinery and Equipment

Total

National Machinery and Equipment

Private

Total

Public

-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


No significant price pressures coming from aggregate demand were 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

SeptemberQ3 2016

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

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 Q3 2016, overall labor market conditions seemed to have continued gradually 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

September

IMSS-Insured Jobs, Employed Population and 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.

Q3 2016September

October

Employed Salaried

Population

Real Average Income

Real Wage Bill

Q3 2016

IMSS-affiliated Jobs 1/

Employed Population Total IGAE

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

As of September 2016, annual headline inflation registered 17 consecutive months at levelsunder 3 percent, although in October it lied slightly above this figure.

Consumer Price IndexAnnual % change

Source: Banco de México and INEGI.

Headline

CoreVariability Interval

Non-Core


October


The performance of core inflation is mainly explained by the evolution of themerchandise price sub-index, which responded to the depreciation of the nationalcurrency.

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

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

Merchandise

Core Price IndexAnnual % change

Merchandise and Services

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

October October

Merchandise

Non-foodServices

Food

-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

Agriculture

Livestock

Higher non-core inflation largely derived from increments in gasoline prices, which werepartially offset by drops in the L.P. gas prices.

Agriculture Energy and Government Approved Fares

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

Non-Core IndexAnnual % change

Fruits and Vegetables

Enero


-3

0

3

6

9

12

15

20

09

20

10

20

11

20

12

20

13

20

14

20

15

20

16

Energy and GovernmentApproved Fares

Energy

Government Approved Fares

October October


Long-term inflation expectations derived from surveys and from market instruments remainaround 3 percent.

1.5

2.0

2.5

3.0

3.5

4.0

4.5

5.0

20

07

20

08

20

09

20

10

20

11

20

12

20

13

20

14

20

15

20

16

Headline Inflation Expectations for Different Terms Median, %

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. Forthe current Report, the estimate was updated by including data as of December 2015.Source: Banco de México.

October

Next 4 years

Variability Interval

End of 2016 End of 2017

Long-term (Market Instruments) 1/

Next 5-8 years

4

7

9

12

14

17

19

22

24

27

29

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

12.5

13.5

14.5

15.5

16.5

17.5

18.5

19.5

20.5

21.5

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


Episodes of high volatility in financial markets, mainly related to the electoral process in the U.S., ledto high volatility and a considerable depreciation of the national currency.

Nominal Exchange Rate 1/

Pesos per USDCurrency Option Implied Volatility 2/

%

1/ Refers to FIX Exchange rate. The black vertical line indicates January 1, 2016 and the dotted lineindicates September 29, 2016.Source: Banco de México.

2/ Currency option implied volatility refers to one-month options. The black vertical line indicatesJanuary 1, 2016 and the dotted line indicates September 29, 2016.Source: Bloomberg.

Observed Exchange Rate(last data 22-Nov) 20.52

November November

Depreciation

Regarding the bond market performance, following the announcement of the results in the U.S.elections, the upward trend in interest rates sharply strengthened, especially along the longer endof the yield curve.

Government Bond Interest rates 1/

%Yield Curve

%

1/ Since January 21, 2008, the one-day (overnight) interest rate corresponds to the target for theOvernight Interbank Interest Rate.Source: Banco de México and Proveedor Integral de Precios (PiP) Source: Banco de México and Proveedor Integral de Precios (PiP).

2

3

4

5

6

7

8

9

10

20

11

20

12

20

13

20

14

20

15

20

16

1 day

10 years

30 years

1 year

3 months

2 years


November2.5

3.0

3.5

4.0

4.5

5.0

5.5

6.0

6.5

7.0

7.5

8.0

1 1 3 6 1 2 3 5 10 20 30

Months YearsDay

30-Jun-16

22-Nov-16

31-Mar-16

30-Sep-16

6 months

2.0

2.5

3.0

3.5

4.0

4.5

5.0

5.5

6.0

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


Even though the operating conditions in the national bond markets deteriorated recently,government securities’ holdings by non-residents remained stable at levels close to historicmaximums.

Mexico and United States Interest Rate Spreads 1/

Percentage pointsGovernment Securities’ Holdings by Foreign Investors 2/

MXN billion

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.

2/ The total includes CETES, bonds, udibonos, bondes and bondes D.Source: Banco de México.

20

08

20

09

20

10

20

11

20

12

20

13

20

14

20

15

20

16

0

500

1,000

1,500

2,000

2,500

Mill

ares

November

Total

Bonds

CETES

2 years6 months

3 months

1 day

1 year

November

30 years

10 years

Outline


Monetary Policy1






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

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

Economic Activity Outlook

-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

2016Q4

2017 Q4

2018Q4

2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

Current Account Deficit

(% of GDP)

Report Previous Revised

2016 3.1 3.0

2017 3.2 3.0

2018 -- 3.0

Increase in the number of IMSS-insured jobs

(Thousands)


2016 590 - 690 640 - 710

2017 610 - 710 600 - 700

2018 -- 650 - 750

GDP Growth

(%)


2016 1.7 - 2.5 1.8 - 2.3

2017 2.0 - 3.0 1.5 – 2.5

2018 -- 2.2 - 3.2

That the new administration of the U.S. would indeed implement policies that could hamper the functioning ofshared production chains between Mexico and the U.S.

Persisting episodes of high volatility in international financial markets, which would reduce the sources of financingor foreign investment to Mexico.

That the implementation of structural reforms would have a more positive impact on the economic growth and willbe faster than anticipated.

Risks to the Growth Outlook

Downward:

Upward:


That, in view of the recent depreciation of the exchange rate, non-oil exports would exhibit a more noticeable andlasting recovery, which would further boost industrial production.

That the deterioration that had been observed in consumers’ and investors’ confidence levels would persist,affecting private consumption and investment.

Inflation Outlook

Core inflation

20

16 • It will gradually increase and will lie

slightly above 3 percent by the end ofthe year.


Headline inflation

20

18

• It will be above the inflation target, although within the variability interval.

• It is forecast to close the yearmoderately above 3 percent.

20

17

• It will be close to levels around 3 percent by the end of the year.

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


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 Core Inflation 2/

%

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

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

2016 Q4

2018 Q4

2017 Q4

Annual inflation is forecast to lie slightly over 3 percent by the end of the year. For 2017, it is anticipated to beabove the inflation target, although below the upper limit of the variability interval, getting close to levelsaround 3 percent by the end of 2018.

Downward Upward

That the depreciation of the national currencywould persist or become accentuated, whichwould contaminate inflation expectations andgenerate second round effects, which wouldnegatively affect the price-setting process.

36

Further reduction in prices of widely used inputs,such as telecommunication services, as aconsequence of structural reforms.


Risks to the Inflation Outlook

That the deceleration of the national economicactivity would accentuate.

Price increments in agricultural products andgasoline, although their impact on inflation wouldbe transitory.


Monetary Policy Stance

Recent international events could impact the structural links between Mexico andits main trade partner. In this context, it is both natural and necessary to observe adepreciation of the real exchange rate, being the most efficient adjustmentmechanism and shock absorber.

The main contribution of Banco de México during this adjustment process, givenits mandate, is to ensure that changes in relative prices take place in an orderlyfashion, in order to prevent inflation expectations from being contaminated, andto avoid second round effects, which would negatively impact the price-settingprocess of the economy.


Monetary Policy Stance

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

→ This will be done in order to be able to continue taking the necessary measures to consolidate theefficient convergence of inflation to its 3 percent target, with full flexibility and to the extent that theprevailing conditions may demand.

The possible pass-through of exchange rate adjustments onto prices, without implying anypreset or desired level for the exchange rate.

The monetary position of Mexico relative to that of the U.S., without overlooking the evolutionof the output gap.


Strengthening Confidence in the Mexican Economy

It is indispensable to continue implementing structural reforms adequately andpromptly, as they would boost the country’s productivity and would allow a betterresource allocation.

In addition, structural reforms will allow fostering greater sustained growth in thedomestic market, which will contribute to offset the effects of the deeply adverseexternal environment faced by the Mexican economy.

Current risks to the trade relation between Mexico and the U.S. highlight theimportance of diversifying Mexican exports’ destinations.

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