Agustín Carstens, Governor, Banco de México: Viewpoint

Viewpoint: Agustín Carstens

It is estimated that during 2017 inflation will hover around the upper limit of the variable interval established by the Banco de México – this limit is 4% annually.

It is, however, expected that during the last months of 2017 the rate will converge downwards towards this target and will lie around 3% at the end of 2018.

Therefore, inflation for 2017 is expected to be temporarily affected both by the relative prices of goods in relation to services, due to the depreciation of the real exchange rate, and also by the nationwide impact of the liberalisation of petrol prices.

It is also estimated that in 2017, core inflation will also remain at levels above the bank’s permanent target of 3%. However, it is anticipated that by the end of 2017 and 2018, both indicators will resume a convergent trend downwards towards the permanent inflation goal.

This is in a context in which inflationary pressures are not expected to occur derived from aggregate demand, as the effects of the aforementioned shocks fade away and as the monetary policy measures already implemented take effect, along with the new policy to be implemented during 2017.

Going forward, the Board of Governors of Banco de México will very closely follow the evolution of all the determinants of inflation and its medium- and long-term expectations.

This is especially relevant given the potential transfer of exchange rate pressures and petrol prices to the rest of consumer prices, as well as the relative monetary position between Mexico and the US and the evolution of the output gap.

This is necessary in order to be able to continue taking the necessary measures to achieve the bank ’s 3% inflation target.

Independently of any external event, Mexico must continue to increase its competitiveness vis-à-vis the external market; in addition, it must also boost its potential for growth in the domestic market.

To this end, the commitment to properly – and in a timely fashion – implement the already approved structural reforms, and to continue with the fiscal consolidation effort, must prevail, despite any potential obstacles.

The strengthening of both the microeconomic performance and macroeconomic strength of the economy will enable the country to become a more attractive destination for investment, particularly as it looks further afield for that investment.

In addition, it is essential to strengthen the rule of law and ensure legal certainty in order to foster a more favourable environment for growth.

This has become even more relevant to the challenges Mexico faces as a result of the economic agenda that the neighbouring country to the north intends to promote.

In this regard, given the possibility of the US implementing protectionist policies that hinder trade, not only with Mexico but with other economies, it is necessary to promote and adopt strategies that increase productivity and competitiveness.

While it is true that North American trade integration has benefitted all members of the bloc and that deepening economic relations could increase the region’s competitiveness vis-à- vis other economic regions, it is also imperative to maintain the country’s overall economic openness and diversity and to seek a greater diversification of both destination markets for Mexican exports as well as the origin of foreign direct investment and imports into the country.