Banco de México is Mexico’s central bank, an internally autonomous public institution whose governor is appointed by the president and approved by the legislature to which it is fully responsible. Banco de México’s functions are outlined in the 28th article of the constitution and further expanded in the Monetary Law of the United Mexican States.
Banco de México’s main objective is to achieve stability in the purchasing power of the national currency. It is also the lender of last resort.
Currency Policy
Mexico has a floating exchange rate regime.
The floating exchange originated with reforms initiated after the December 1994 peso crash which had followed an unsustainable adherence to a short band. Under the new system, Banco de México now makes no commitment to the level of the peso exchange rate, although it does employ an automatic mechanism to accumulate foreign reserves. It also possesses tools aimed at smoothing out volatility.
The Exchange Rate Commission sets policy; it is made up of six members—three each from the Ministry of Finance and Public Credit (Secretaría de Hacienda y Crédito Publico—SHCP) and the central bank, with the SHCP holding the deciding vote.
In August 1996, Banco de México initiated a mechanism to acquire foreign reserves when the peso is strong, without giving the market signals about a target range for the exchange rate. The resulting high levels of reserves, mostly from petroleum revenues, have helped to improve the terms and conditions on debt Mexico places on foreign markets. However, there is concern that the government relies too heavily on oil income in order to build a healthy base of reserves.
According to the central bank, international reserves stood at US $75.8 billion in 2007. In May 2003, Banco de México launched a program that sells U.S. dollars via a monthly auction, with the goal of maintaining a stable, but moderate, level of reserves.
From April 1, 1998 through April 1, 2008 the Peso traded around a range varying from $8.46 MXN per $1.00 USD on April 21, 1998 to $11.69 MXN per $1.00 USD on May 11, 2004, a 10 year peak depreciation of 38.18% between the two reference date extremes before recovering.
After the onset of the US credit crisis that accelerated in October 2008, the Peso had an exchange rate during October 1, 2008 through April 1, 2009 fluctuating from lowest to highest between $10.96 MXN per $1.00 USD on October 1, 2008 to $15.42 MXN per $1.00 USD on March 9, 2009, a peak depreciation ytd of 28.92% during those six months between the two reference date extremes before recovering.
From the $11.69 rate during 2004′s low to the $15.42 rate during 2009′s low, the peso depreciated 31.91% in that span covering the US recession coinciding Iraq War of 2003 and 2004 to the US & Global Credit Crisis of 2008.
Some experts including analysts at Goldman Sachs who coined the term BRIC in reference to the growing economics of Brazil, Russia, India, and China for marketing purposes believe that Mexico is going to be the 5th or 6th biggest economy in the world by the year 2050, behind China, United States, India, Brazil, and possibly Russia.
Monetary System
Mexico’s monetary policy was revised following the 1994–95 financial crisis, when officials decided that maintaining general price stability was the best way to contribute to the sustained growth of employment and economic activity. As a result, Banco de México has as its primary objective maintaining stability in the purchasing power of the peso. It sets an inflation target, which requires it to establish corresponding quantitative targets for the growth of the monetary base and for the expansion of net domestic credit.
The central bank also monitors the evolution of several economic indicators, such as the exchange rate, differences between observed and projected inflation, the results of surveys on the public and specialists’ inflation expectations, revisions on collective employment contracts, producer prices, and the balances of the current and capital accounts.
A debate continues over whether Mexico should switch to a US-style interest rate-targeting system. Government officials in favor of a change say that the new system would give them more control over interest rates, which are becoming more important as consumer credit levels rise.
Until 2008, Mexico used a unique system, amongst the OECD countries, to control inflation in a mechanism known as the corto (lit. “shortage”) a mechanism that allowed the central bank to influence market interest rates by leaving the banking system short of its daily demand for money by a predetermined amount. If the central bank wanted to push interest rates higher, it increased the corto. If it wished to lower interest rates, it decreased the corto. In April 2004, the Central Bank began setting a referential overnight interest rate as its monetary policy.