Mexico Project: Monetary Economics: Current Monetary Conditions



Inflation Rates:	Period	Rate
Annual inflation	Feb 07 - Feb 08	3.72%
Annual "core" inflation	Feb 07 - Feb 08	4.14%
Monthly inflation	Feb 2008	0.30%
Monthly "core" inflation	Feb 2008	0.47%

*Mexico's annual target inflation rate is 3.00%

Interest Rates	Period	Rate
28 day TIIE	Jan 07 - Dec 07	7.925%
28 day TIIE	Feb 2008	7.935%
Annual Bank Funding Rate	Feb 07 - Feb 08	7.57%
Monthly Bank Funding Rate	Feb 2008	7.51%
Annual Gov't Funding Rate	Jan 07 - Dec 07	7.58%
Monthly Gov't Funding Rate	Feb 2008	7.44%

*Mexico's interest rate target for overnight
funding operations between banks is 7.50%

History of Monetary Policy

April 19, 1905

· Mexico Establishes Gold Standard

1970-1982

· GDP growth of 6%

1988 – 1994

· Economic policy in Mexico was subordinated to a national agreement (Pacto), which existed between government, business and workers.

· Goal was to lower inflation, by establishing exchange rate as nominal anchor of economy.

· Banco de Mexico supported the exchange rate regime(Crawling peg).

· Impact of the monetary policy is that inflation reduced from 1987(159%) – 1994 (7.1%).

· This led to overvaluation of currency, increasing current account deficit; hence leading to a devaluation of the peso and an economic crisis in 1994.

1994

· Mexico Congress grants Banco de Mexico with control over its credit operations

· Goal : To establish price stability, reduce inflation

1995

· Flexible exchange rate regime adopted.

· Goal: Annual inflation objective, Quantitative monetary goals.

Current Monetary System

In 1995, amid the Mexican peso crisis, as well as pressure from the global foreign exchange market, Mexico was forced to transition from a crawling peg to a floating exchange rate regime.

The pegged currency had previously served as the nominal anchor of Mexico's economy, but under the floating system, the central bank must fill that role. This means controlling the money supply and inflation through open market operations, as well as increasing transparency throughout the banking system.

Since the crisis in 1995, the peso has generally depreciated against other major currencies. Relative to the dollar, the peso was at its strongest point in January 1998, when a dollar could buy only a little more than 8 pesos. In May 2004, the peso was at its weakest point, and a dollar could buy 11.6 pesos. Currently, the pesos per dollar rate is 10.7.

This depreciation is consistent with the Mexican central bank's strategy of increasing foreign exchange reserves to offset upward pressures on the domestic currency. This keeps Mexican exports competitive in the global market. In 1995, the bank held foreign exchange reserves worth just over $16 billion. Over the past 13 years, that number has swollen to over $78 billion.

Trade Summary

Primary imports:

metalworking machines,
steel mill products,
agricultural machinery,
electrical equipment,
car parts for assembly,
repair parts for motor vehicles,
aircraft and aircraft parts

Primary import partners (2006):

US 50.9%,
China 9.5%,
Japan 6%,
South Korea 4.2%

Primary exports:

manufactured goods,
oil and oil products,
silver,
fruits,
vegetables,
coffee,
cotton

Primary Export Partners (2006):

US 84.7%,
Canada 2.1%,
Spain 1.3%

Mexico Project: Monetary Economics

Current Monetary Conditions

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History of Monetary Policy

Current Monetary System

Trade Summary