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.