Mexico

Mexico[MXN]

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 Governing Board; Four Deputy Governors and one Governor
Major mandates 1 Its primary objective mandated by law is to procure the stability of the purchasing power of the national currency through an inflation target. Secondary objectives include promoting the sound development of the financial system and fostering the proper functioning of the payment systems.
Decision-making process All decisions must be validated by approval of the majority of the members attending the meeting. If there is a tie, the Board member chairing the meeting has the casting vote. 2
Frequency / length of meetings 8 meetings per year, each one with a lenght of one day
Frequency of announcements 8 times per year
Main policy target Overnight Interbank Funding Rate

Overview of key features

Key policy rate Overnight Interbank Funding Rate (Monetary Policy Rate)
maturity (days) One day (overnight)
Operating target Collateralised Overnight Interbank Rate
maturity (days) One day (overnight)
Standing facilities Lending and deposit facilities
Corridor width (bp) Variable (Deposit: MPR 0%; Lending: MPR * 2) 3
Reserve requirements No 4
maintenance period N/A
Main operation 5 RP and Deposits
functions Liquidity management 6
maturity (days) Liquidity management 7
regular interval Liquidity management 8
frequency Liquidity management 9
Overall frequency Daily
Discretion left to operational desk The operational desk has some discretion over certain aspects of RPs and Deposits such as tenors and amounts offered.
Key policy signals via
announcement Yes
keynote tender Yes
standing facility Yes
other Yes

Monetary policy communication

Explicit use of forward guidance No
Timing / media of policy announcement Yes. Monetary policy decisions are announced at 13:00 GMT-6 on the day of the board meeting (Thursdays) via the central bank website.
Policy announcement and documents Target policy rate, monetary policy statements and minutes regarding monetary policy decisions.
Explaining policy decisions All policy decisions are accompanied by a monetary policy statement.
Dissemination of minutes (timing / media) Yes. The minutes are published at 9:00 GMT-6, usually two weeks after the monetary policy announcement via the central bank website.
Content of minutes General description of economic and financial conditions. Description of the policy considerations, voting results, and voter’s identity. In case there are dissenting opinions in the voting, the arguments of the dissenters are included.
Publication of forecasts 10 Not in the monetary policy statement. Forecasts are published in the Quarterly Inflation Reports.
Publication of projected path of policy rate 11 No

Reserve requirements: ratios and size

Main functions served Liquidity management 12
Domestic currency Yes 13
Foreign currency No
Average N/A
Required reserves MXN 270 bn 14
Required reserve as % of GDP 1.12% 15
Actual reserves MXN 270 bn 16
Actual reserve as % of GDP 1.12% 17

Main features of reserve requirements

Averaging No 18
Carry-over No
Type N/A*
Maintenance period Daily
end (day) Daily
Calculation period N/A*
end (day) N/A*
Lag before maintenance N/A*
Vault cash No
restrictions N/A*
Remuneration Yes
average rate Key policy rate: Overnight Interbank Funding Rate
marginal rate Key policy rate: Overnight Interbank Funding Rate
Framework last changed March 2020 19

Liquidity position and forecasting

Structural Position Surplus 20
Most volatile factor(s) Government outlays
Most unpredictable factor(s) FX interventions
Forecast horizon(s) Up to 1 year
Frequency Daily
Frequency of revision Daily 21
Forecast published? Yes 22

Standing facilities: lending / market ceiling

Name Standing Facility
Form Secured Loan and Intraday Repo (inject liquidity - RP) 23
Pricing method Lending: 2 times the key policy rate (Overnight Interbank Funding Rate)
Maturity One day (overnight)
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 One day (overnight)
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 24 RP and Deposits 25
Maturity 1 to 25 days 26
Frequency Daily, as needed
Pricing method Auction: RP (Key policy rate - floor), Deposits (Key policy rate - ceiling)
Access limited by/to Commercial and development banks only
Function(s) Liquidity management, reinforce key policy rate. 27

Open market operations: central bank bills

Name Government bonds 28
Total issuance MXN 1.2 bn
Maturity Zero-coupon bonds: up to two years
FRN: Up to 5 years
Restrictions on possible maturities Longest maturity for Zero-coupon bonds capped at 2 years and for FRN currently capped at 5 years.
Pricing method Multiple or single price competitive auctions.
Access limited by/to Commercial and development banks, and Bank of Mexico eligible counterparties (ie pension funds, investment funds, brokerage houses)
Discretion left to operational desk The operational desk has 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 29 Voluntary deposits
Form Liquidity deposit
Frequency Every 3 months 30
Maturity 91 days on avergae
Pricing Method Fixed rate, same as 91-day Cete (zero-coupon bond) allotted in the last government securities primary auction.
Access limited by/to Commercial and development banks only
Function(s) Alternative for banks without MRDs or with a small amount in MRDs, which can use these deposits 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 Government bonds, central bank bonds, IPAB bonds, MRDs, deposits executed through OMOs, voluntary deposits (3-month deposits), deposits carried out in the determination of the TIIE rate, and USD deposits are eligible. 31
Standing facilities: Discretion of central bank on collateral 32 Complete discretion. For regular standing facilities the list of eligible collateral is already set; still, it could change under the central bank´s discretion. 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, IPAB bonds, MRDs, deposits executed through OMOs, voluntary deposits (3-month deposits), deposits carried out in the determination of the TIIE rate, and USD deposits are eligible.
Open market operations: Discretion of central bank on collateral 33 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) Via the central bank website and through a dedicated broadcast system for banks.
Timing The forecast is published on a daily basis only for the current day, approximately half an hour before OMOs start (around 7:00 GMT-6).
Remarks Current day level of liquidity, surplus or deficit.

Dissemination of operational information: open market operations

Volume and price published? Yes
Channel(s) Via the central bank website and through the auctions system.
Timing Volume and price (minimum and/or maximum bid): with auction announcement, shortly before OMOs start.
Volume and pricing allotment: immediately upon finishing operations.

Dissemination of operational information: standing facilities

Lending facility usage: Channel(s) Via the central bank website.
Lending facility usage: Timing Monthly
Deposit facility usage: Channel(s) Not published
Deposit facility usage: Timing N/A

Other information dissemination

Type (i) FX interventions
(ii) Money Market Representative Interest Rates
(iii) Bank of Mexico economists survey
(iv) Quarterly Inflation Reports
(v) Financial Stability Reports
(vi) Regional Economic Reports
(vii) Governing Board's speeches, presentations, articles and other publications
(viii) Market data
Channel(s) Bank of Mexico website
Timing (i) Real time and/or weekly
(ii) Daily
(iii) Monthly
(iv) Quarterly
(v) Biannual
(vi) Quarterly
(vii) Same day
(viii) Daily, weekly, monthly (depending on the data)

1 Describe as well the legal status of the mandate and involvement of government

2 If the Governor is not present, the meeting is chaired by whom he/she appoints or by the Deputy Governor who has served the most years in office.

3 The Bank of Mexico uses an active strategy in the liquidity management operations given its privileged position of knowing what are the market liquidity needs. In that sense, the corridor is used to disincentivize market participants who at the end of the day remain either short or long in their current accounts at the central bank.

4 There are no Reserve requirements in Mexico, although there are remunerated mandatory deposits defined as Monetary Regulation Deposits (MRDs). The difference between the two rely in that MRDs are set indefinitely for a fixed amount based on a percentage of banks´ liabilities at a determined point in time. Since 2014 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 instruments can only be used as repo collateral with the central bank and/or with commercial and development banks.

5 RP = reversed purchase (repo, inject liquidity), RS=RRP=reversed sale (reverse repo, absorb liquidity), RT=reversed transaction (repo or reverse repo).

6 Provide money market participants with certainty regarding their liquidity needs, which contributes to the stability of money markets, leading makets participants to engage in funding operations at a similar rate to the key policy rate.

7 Provide money market participants with certainty regarding their liquidity needs, which contributes to the stability of money markets, leading makets participants to engage in funding operations at a similar rate to the key policy rate.

8 Provide money market participants with certainty regarding their liquidity needs, which contributes to the stability of money markets, leading makets participants to engage in funding operations at a similar rate to the key policy rate.

9 Provide money market participants with certainty regarding their liquidity needs, which contributes to the stability of money markets, leading makets participants to engage in funding operations at a similar rate to the key policy rate.

10 For instance, economic and inflation forecasts related to policy decision.

11 If applicable, describe the publication of any fan-charts or uncertainty bands around the forecasts/projections.

12 Monetary Regulation Deposits (MRDs) determined as a set MXN amount per banking institution based on a percentage of their liabilities at a specific point in time.

13 Monetary Regulation Deposits (MRDs) determined as a set MXN amount per banking institution based on a percentage of their liabilities at a specific point in time.

14 During March 2020, the central bank decided to reduce the amount commercial and development banks held in DRMs by 50 billion MXN.

15 As a percent of 2019 nominal GDP.

16 During March 2020, the central bank decided to reduce the amount commercial and development banks held in DRMs by 50 billion MXN.

17 As a percent of 2019 nominal GDP.

18 Monetary Regulation Deposits (MRDs) determined as a set of MXN amount per banking institution based on a percentage of their liabilities at a specific point in time.

19 During March 2020, the central bank decided to reduce the amount commercial and development banks held in DRMs by 50 billion MXN.

20 Due to foreign exchange reserves accumulation, the financial system has had a liquidity surplus position. The central bank has carried out operations to secure a net debtor position against the system.

21 Information for the implementation of daily OMOs is incorporated on a daily basis. However, the longer term liquidity forecasts are revised on a quarterly basis.

22 The forecast is published on a daily basis only for the current day, approximately half an hour before OMOs start.

23 Reverse repos started being implemented in 2019.

24 RP=Reversed purchase (“repo”), RS=RRP=Reversed Sales (“reverse repo”), RT=Reversed transaction (RP or RRP).

25 With the purpose of absorbing liquidity, the central bank carries out deposit auctions. The Bank of Mexico does not provide any type of collateral to banks, hence, we execute these OMOs operations through deposits and not RRPs.

26 The maturity of these operations has been of up to 55 days.

27 Provide money market participants with certainty regarding their liquidity needs, which contributes to the stability of money markets, leading makets participants to engage in funding operations at a similar rate to the key policy rate.

28 The Bank of Mexico uses government bonds for its outright securities sell/purchase OMOs. However, it should be stressed that these securities do not finance the government and that the financial costs are completely covered by the central bank.

29 OT = Outright Transaction, DB = Direct Borrowing, DL = Direct Lending.

30 This facility has been abvailable since February 2017.

31 IPAB: Refers to Instituto para la Protección al Ahorro Bancario, an institution dedicated to protect depositors´ money at a commercial banks in Mexico. Among its main functions, IPAB guarantees bank deposits of up to 400,000 investments units (Udis) or approximately 2.6 million pesos, it implements measures to resolve any solvency problems from banks, manages assets from banks with solvency problems, and manages its own debt through the issuance of Savings Protections Bonds (BPAs).

32 Discretion of the central bank to expand collateral types, and list of additional collateral types that the central bank can take on a discretionary basis. Also, additional information such as delays required if discretionary collateral changes.

33 Discretion of the central bank to expand collateral types, and list of additional collateral types that the central bank can take on a discretionary basis. Also, additional information such as delays required if discretionary collateral changes.