Mexico

Mexico[Mex$]

Institutional framework

The Mexican Constitution determines, in Article 28, that the State "shall have a Central Bank, whose primary objective shall be to attain the stability of the purchasing power of the national currency". Moreover, Bank of Mexico's Law establishes that " Bank of Mexico's purpose shall be to provide the country's economy with domestic currency. In pursuing this purpose, its primary objective shall be to seek the stability of the purchasing power of said currency." However, the Law also gives the Bank of Mexico additional objectives, such as "promoting the sound development of the financial system and fostering the proper functioning of payment systems."

The same Law establishes that the Board of Governors has, among its attributions, "the power to establish the Bank's operational policies and guidelines and determine the characteristics of those transactions". Therefore, the Board of Governors is the solely responsible for the decision making process related to monetary policy.

Key features of the monetary policy implementation framework

The key policy rate in Mexico is determined as the Overnight Interbank Funding Rate, which has been used since 21 January 2008. On a daily basis, the Bank of Mexico provides or withdraws liquidity to the system through Open Market Operations performed by the Domestic Operations Department, in order to guarantee that short-term rates remain near the target rate. The amount of daily interventions is determined based on the variations of autonomous factors, aiming for a daily balance of zero in the banks aggregate accounts within the Bank of Mexico at the end of each day.

Every day, the Bank of Mexico executes short-term Open Market Operations, through repos or deposits, in order to manage the liquidity in the system and provide money market participants with certainty regarding their liquidity needs, assuring that the Bank will satisfy their demand. This credibility contributes to provide stability in money markets, leading market participants to engage in funding operations at a similar rate to the target rate.

In addition, whenever the Bank of Mexico needs to sterilise liquidity for longer periods of time, it also uses medium or long-term Open Market Operations through outright sell or exchange auctions of government securities such as FRNs and zero-coupon bonds. These operations are carried either through scheduled weekly auctions or in the form of extraordinary auctions 1. Furthermore, the Bank of Mexico has other available instruments in its toolkit, such as Monetary Regulation Deposits (MRDs). MRDs are set indefinitely for a fixed amount based on a percentage of banks´ liabilities at a determined point in time. In particular, a percentage of MRDs can be held in the form of debt instruments called Monetary Regulation Bonds (BREMS R) issued by the Bank of Mexico. These securities are non-negotiable in secondary markets and can only be used as repo collateral with the Central Bank and/or with commercial and development banks.

Finally, the Bank of Mexico also has other instruments within its operational framework, such as standing facilities (lending and deposit) to satisfy end of day needs from banks. The lending facility provides the required overnight funds to banks that ask for end-of-day liquidity; however, the use of this facility is penalised with by charging twice the target rate (and in a symmetric way, deposits constituted within the Central Bank are remunerated at zero). The reason behind the width of the aforementioned corridor is to create conditions that incentivise market participants to compensate liquidity excesses or shortages between themselves, and not with the Bank of Mexico.

1

Legal support for these operations stems from Articles 7 and 9 of the Law that governs the Bank of Mexico. The Bank of Mexico is prohibited by law from financing the government. A mechanism was designed that allows the Central Bank to use government securities without acting as its lender.

Institutional setup of monetary policy decisions and operations

Policy decision body, size and composition Board of Governors
Major mandates Price stability through an inflation objective
Decision-making process Vote of members of the Board
Frequency / length of meetings 8 times a year
Frequency of announcements Same
Main policy target Target rate: overnight interbank funding rate

Overview of key features

Key policy rate Overnight interbank funding rate (Monetary Policy Rate)
maturity (days) 1 (overnight)
Operating target Collateralised overnight interbank rate
maturity (days) 1 (overnight)
Standing facilities Lending, deposit
Corridor width (bp) Variable (Deposit: MPR 0%; Lending: MPR * 2)
Reserve requirements No
maintenance period N/A
Main operation RP and Deposits
functions Liquidity management,
maturity (days) Liquidity management,
regular interval Liquidity management,
frequency Liquidity management,
Overall frequency Daily
Discretion left to operational desk Desk has some discretion over certain operational aspects of RPs and Deposits such as tenor and amounts
Key policy signals via
announcement
keynote tender
standing facility
other

Monetary policy communication

Explicit use of forward guidance No
Timing / media of policy announcement Yes. 13:00 pm on the day of the board meeting via central bank website
Policy announcement and documents Target policy rate and press release
Explaining policy decisions All policy decisions per year include a monetary policy statement
Dissemination of minutes (timing / media) Yes. 9:00 am, two weeks after the monetary policy meeting
Content of minutes Description of the policy considerations, voting results, and voter’s identity. In case there are dissenting opinions in the voting, the reasons for such dissents are included. General description of economic and financial conditions.
Publication of forecasts No
Publication of projected path of policy rate No

Reserve requirements: ratios and size

Main functions served Liquidity Management
Domestic currency Yes
Foreign currency No
Average N/A
Required reserves MXN 320 bn
Required reserve as % of GDP 1.6%
Actual reserves MXN 320 bn
Actual reserve as % of GDP 1.3%

Main features of reserve requirements

Averaging N
Carry-over N
Type N/A*
Maintenance period Daily
end (day) Daily
Calculation period N/A*
end (day) N/A*
Lag before maintenance N/A*
Vault cash N
restrictions N/A*
Remuneration Y
average rate Target rate: overnight interbank funding rate
marginal rate Target rate: overnight interbank funding rate
Framework last changed 05/14

Liquidity position and forecasting

Structural Position Surplus
Most volatile factor(s) Government outlays
Most unpredictable factor(s) FX interventions
Forecast horizon(s) 1 year
Frequency Daily
Frequency of revision Daily
Forecast published? Yes

Standing facilities: lending / market ceiling

Name Standing Facility
Form Secured Loan and Intraday Repo (inject liquidity - RP)
Pricing method Lending: 2 times the Key Policy Rate (Overnight Interbank Funding Rate).
Maturity O/N
Access limited by/to Commercial and development banks only
Function(s) Marginal liquidity management. Lender of last resort, to help alleviate short-term liquidity bottlenecks

Standing facilities: deposit / market floor

Name Standing facility
Form Deposit
Pricing method 0%
Maturity O/N
Access limited by/to Commercial and development banks only
Function(s) Marginal liquidity management. To help alleviate short-term liquidity bottlenecks. Depository for surplus cash reserves.

Open market operations: repo or reverse repo

Name/Type RP and deposits
Maturity 1 to 25 days in average
Frequency Daily, as needed
Pricing method Auction: RP (Target rate floor), Deposits (Target rate ceiling)
Access limited by/to Commercial and development banks only
Function(s) Liquidity management, reinforce target rate

Open market operations: central bank bills

Name Government bonds
Total issuance MXN 1.013bn
Maturity Zero-coupon bonds: up to a year
FRN: Up to 5 years
Restrictions on possible maturities Longest maturity for Zero-coupon bonds capped at 1 year and for FRN currently capped at 5 years
Pricing method Multiple or single price competitive auctions
Access limited by/to Banks and Bank of Mexico eligible counterparties (ie pension funds, investment funds, brokerage houses)
Discretion left to operational desk Some discretion related to the choice of tenors, issue size, and instruments used. Always with upper management approval

Open market operations: FX swaps

Maturity N/A
Frequency N/A
Pricing method N/A
Access limited by/to N/A
Function(s) N/A

Other significant liquidity management means

Name/Type Voluntary deposits
Form Liquidity deposit
Frequency Every 3 months
Maturity 91 days
Pricing Method Fixed rate (same as 91-day Cete (zero-coupon bond) allotted in government securities primary auction)
Access limited by/to Commercial banks and development banks
Function(s) Alternative for small banks without MRD to maintain as a source of collateral for operations of liquidity provision carried out by the Central Bank.

Settlement systems and intra-day liquidity facilities

Settlement system RTGS
Intra-day liquidity facility Intra-day repo and intra-day overdraft through secured loans
Charge No charge
Foreign currency settlement system Yes
CLS participation by banks Yes, some commercial banks
Other settlement system(s) N/A

Collateral

Standing facilities: List of eligible collateral Monetary regulation deposits (MRDs), deposits exeuted through OMOs, voluntary deposits (3-month deposits), deposits carried out in the determination of the TIIE rate, and USD deposits are eligible. Government bonds, central bank bonds, IPAB bonds.2
Standing facilities: Discretion of central bank on collateral Complete discretion. For regular standing facilities the list of eligible collateral is already set; still, it could change under the Central Bank´s discretion. Also, the Bank of Mexico has the possibility to expand the list of eligible assets through emergency standing facilities. Eligibility criteria is laid down in current regulation.
Open market operations: List of eligible collateral Government bonds, central bank bonds, and IPAB2 bonds. Also, monetary regulation deposits (MRDs), deposits carried out in the determination of the TIIE rate, voluntary deposits (3-month deposits), and USD deposits are eligible.
Open market operations: Discretion of central bank on collateral Complete discretion. For regular OMOs the list of eligible collateral is already set; still, it could change under the Central Bank´s discretion.

Dissemination of operational information: liquidity forecast

Forecast published? Yes
Channel(s) Bank of Mexico website and through a dedicated broadcast system for banks
Timing Shortly before morning OMOs (around 7:15 am)
Remarks Same day actual level of liquidity surplus/deficit

Dissemination of operational information: open market operations

Volume and price published? Yes
Channel(s) Bank of Mexico website and auctions system
Timing Volume and Price (minimum and/or maximum bid): Shortly before operations with auction announcement
Volume and Pricing Allotment: Immediately upon finishing operations

Dissemination of operational information: standing facilities

Lending facility usage: Channel(s) Bank of Mexico website
Lending facility usage: Timing Monthly
Deposit facility usage: Channel(s) Not published
Deposit facility usage: Timing

Other information dissemination

Type (i) FX intervention
(ii) Effective Interbank funding rate
(iii) Bank of Mexico economists survey
(iv) Quarterly Inflation Reports
(v) Financial Stability Reports
(vi) some speeches or presentations done by members of the Board of Governors
(vii) Market data
Channel(s) Bank of Mexico website
Timing (i) Real time and/or weekly
(ii) Daily
(iii) Monthly
(iv) Quarterly
(v) Biannual (vi) Same day
(vii) Daily, weekly, monthly