Banco de Mexico : Minutes of the meeting of Banco de México's Governing Board on the occasion of the monetary policy decision announced on December 17, 2020

Minutes number 81

Mee�ng of Banco de México's Governing Board on the occasion of the monetary policy decision announced on December 17, 2020

This document is provided for the reader's convenience only. The transla�on from the official Spanish version wasmade by Banco de México's staff. Discrepancies may possibly arise between the original document in Spanish and its English transla�on. For this reason, the original Minutes in Spanish are the only official document.

FOREWARNING

This document is provided for the reader's convenience only. The translation from the official Spanish version was made by Banco de México's staff. Discrepancies may arise between the original document in Spanish and its English translation. For this reason, the original Spanish version is the only official document.

1. PLACE, DATE, AND PARTICIPANTS 1.1 Place: Meeting held by virtual means.

1. Date of Governing Board meeting: December 16, 2020.
2. Participants:

Alejandro Díaz de León-Carrillo, Governor. Irene Espinosa-Cantellano, Deputy Governor. Gerardo Esquivel-Hernández, Deputy Governor. Javier Eduardo Guzmán-Calafell, Deputy Governor.

Jonathan Ernest Heath-Constable, Deputy Governor.

Arturo Herrera-Gutiérrez, Secretary of Finance and Public Credit.

Gabriel Yorio-González, Undersecretary of Finance and Public Credit.

Elías Villanueva-Ochoa, Secretary of the Governing Board.

Prior to this meeting, preliminary work by Banco de México's staff analyzing the economic and financial environment as well as the developments in inflation and the determinants and outlook for inflation, was conducted and presented to the Governing Board (see Annex).

2. ANALYSIS AND RATIONALE BEHIND THE

GOVERNING BOARD'S VOTING

International environment

Most members mentioned that global economic activity has been recovering, although heterogeneously among countries and sectors. Some members noted that it is still below pre- pandemic levels. They pointed out that the differences in the recovery are partly associated with the implemented policies. In this regard, one member noted that consumption and investment have recovered more in economies that have implemented significant relief measures.

The majority of members highlighted the increase in COVID-19 infections in advanced economies. They noted that, in this context, growth forecasts for the next few quarters have

been revised downwards. One member indicated that confidence indicators have deteriorated as a result of the implementation of new lockdown measures. Another member considered that the recovery has continued and that growth forecasts for 2020 and 2021 have improved compared to those of last June. He/she stated that advanced economies' forecasts have increased for the second half of 2021 in light of expectations that vaccination will allow for a greater control of the pandemic. One member noted that the slowdown in advanced economies will have a negative impact on global activity, with longer- lasting effects.

Most members highlighted the risks for global economic growth associated with the evolution of the pandemic and with vaccine production and distribution. One member mentioned that the start of the vaccination phase in the United Kingdom and the United States could help reactivate consumer confidence and support the recovery. Another member noted that while several vaccines are expected to complete their testing stages in the short term, it is not yet possible to dispel doubts about their effectiveness nor to rule out potential errors in their implementation. Most members added as a risk that fiscal stimuli turn out to be insufficient to support the recovery. One member stated that recent announcements and decisions by various authorities have contributed to diminish the perception of risks derived from an early withdrawal of relief measures. Another member highlighted the obstacles in the Brexit process, the unsustainability of public and corporate debts, as well as the possibility of a bubble in the prices of technology firms' equity. Some members stated that the balance of risks to global growth remains biased to the downside. One member considered that the environment for the recovery is uncertain, with a better outlook in the medium term.

The majority of members mentioned that inflation in advanced economies remains below their central banks' targets. One member stated that a recomposition of relative prices, with increases in those of certain merchandises and decreases in those of services, has been observed. He/she highlighted the marked volatility in energy prices in the face of changes in the outlook for economic recovery. He/she pointed out that in the United States food inflation has increased significantly and services inflation has decreased considerably. He/she added that in the euro area lower food inflation and the weakness in services prices have been reflected in headline and core inflation levels

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close to zero. He/she also noted that in Japan headline and core inflation are markedly negative. Another member pointed out that in some emerging economies upward pressures on inflation due to food price increases and exchange rate depreciations were observed. One member noted that the effects of lower global aggregate demand have been more significant in services as well as in some goods, such as clothing and footwear. He/she mentioned that global inflation forecasts remain low, although with a greater variability than a year ago.

All members mentioned that central banks of advanced economies reiterated their intention to maintain accommodative monetary policy stances for an extended period. Most members highlighted the possibility of further monetary stimuli. Some members stressed the Federal Reserve's decision to maintain its range for the federal funds rate at 0-0.25%. One member stated that given its new monetary policy strategy, it would take longer than before for this central bank to raise its interest rates. Another member noted that in its latest decision it committed to continue buying monthly Treasury bonds and mortgage-backedassets for an indefinite period, at the established minimum amounts. He/she added that the European Central Bank kept its reference rates unchanged and announced increases and extensions in its asset purchase programs and long-termrefinancing facilities. Most members noted that the fiscal authorities of several advanced economies also announced extensions to their relief programs. Some members stated that the expectation of an additional fiscal stimulus package in the United States has gained strength.

Most members agreed that global financial markets have performed favorably, driven by progress in the development of vaccines against COVID-19. One member pointed out that the increase in commodity prices and the orderly resolution of the electoral process in the United States also contributed to the improved functioning of financial markets.

The majority of members highlighted the favorable performance of stock markets in the main economies, the depreciation of the US dollar against a broad basket of currencies and the lower risk aversion. One member stated that certain stock indexes have even reached record highs. He/she added that corporate bond spreads also declined. Another member explained that the lower risk aversion has favorable implications for less secure assets such as those from emerging

economies. One member added that the extension of monetary stimuli has increased the valuations of financial assets. Another member considered that going forward markets are expected to continue to perform favorably with the progress in the vaccination process, which could be consolidated starting in the second quarter of 2021.

Most members mentioned that financial markets of emerging economies also performed positively, highlighting the increase in capital inflows. Some members referred to the increase in inflows to equity instruments. One member pointed out that this result contrasts with the situation observed in previous months. Another member added that, despite this increase, significant contractions continue to be registered in cumulative flows during the year. One member pointed out that capital inflows have had a positive impact on currency prices, stock market indexes and interest rates in emerging economies. Another member noted that the current environment has been favorable for assets from these economies, although there have been episodes of volatility.

The majority of members considered that international financial markets are subject to several risks, with those already mentioned for global activity standing out. One member added that neither external nor idiosyncratic risks can be ruled out, which, if materialized, could have a significant impact on emerging economies.

Economic activity in Mexico

All members highlighted that, after the recovery of the third quarter, economic activity in Mexico continued to improve at the beginning of the fourth. Most members indicated that activity remains below pre-pandemic levels and that the pace of recovery has moderated. One member added that it is difficult to make an accurate assessment of the evolution of activity during the fourth quarter, due to the limited information available and the uncertainty associated with the pandemic.

All members noted that external demand has shown greater dynamism. Most members pointed out that during October, exports, especially manufactures, exceeded pre- pandemic levels. One member stated that consumption of imported goods registered an annual variation of -19%in September and that imports of oil-relatedconsumer goods contracted by 44% in October. Some members mentioned that the

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