HIS EXCELLENCY BENIGNO S. AQUINO III
Republic of the Philippines
Dear Mr. President:
In line with the BSP’s commitment to promote greater understanding of monetary policy under the inflation targeting framework, we submit this open letter to the President and the Filipino people to explain why the 2015 average inflation of 1.4 percent was lower than the National Government’s (NG) target range of 2-4 percent. In this letter, we also explain the rationale behind our monetary policy decisions in 2015, as well as our assessment of the inflation outlook and policy directions for 2016 and beyond.
The Government’s inflation target of 2-4 percent for 2015 was set by the Development Budget and Coordination Committee (DBCC) on 28 November 2012. This was subsequently announced to the public on 13 December 2012. On 3 February 2015, the DBCC reaffirmed its outlook and announced an inflation target of 2-4 percent for 2015-2016 as well as for 2017-2018.
What happened to prices in 2015?
Price movements were more subdued in 2015 than initially expected when the inflation target was set in 2012. Headline inflation eased considerably during the year on account mainly of slower increases in food prices due to the adequate supply of food commodities, including rice. Electricity rates and oil prices dropped, leading to some dampening on inflation. These developments reflected the sustained decline in international crude oil prices due mainly to the glut in global supply, as the demand for oil also remained weak amid soft growth prospects across the globe. Taken together, these factors contributed to slower price increases in 2015.
How did the monetary authorities respond to emerging challenges to the inflation outlook over the policy horizon?
The BSP decided to keep its monetary policy settings in 2015 despite inflation falling below the NG’s inflation target. In its communication to the public, the BSP had made it clear that domestic price movements in 2015 were being driven largely by transitory supply-side factors that were outside the influence of monetary policy. At the same time, the BSP noted that domestic spending was robust during the year, supported by favorable business and consumer sentiment as well as by ample domestic liquidity and credit. Equally important, expectations of the public on future inflation also remained aligned with the NG’s inflation target. Finally, there were no firm indications of second-round effects, such as a slowdown in economic activity or petitions for wage and transport fare adjustments, that would have reinforced the decline in inflation that should warrant monetary action from the BSP. All of these considerations supported the BSP’s decision to keep its monetary policy settings steady in 2015.
What is the outlook for inflation and monetary policy?
The latest baseline forecasts of the BSP indicate that inflation is likely to rise gradually and is expected to be within target in 2016 and 2017. Inflation gained some momentum near the end of 2015, as the impact of recent typhoons led to increases in the prices of key food items, notably vegetables, fruits, meat, and fish. Inflation is also seen to be higher in 2016-2017 given the low 2015 base. Finally, improved demand from recovering economies could spark a rally in international oil prices. Potential upside risks to the outlook are linked mainly to the impact of El Niño conditions and recent weather disturbances on food prices and utility rates as well as pending petitions for power rate adjustments. Downside risks, meanwhile, could come from slower-than-expected global economic activity.
We would like to assure the President and the Filipino people that the BSP is closely monitoring these developments that could pose risks to the inflation outlook. This is to ensure that monetary policy remains consistent with the economy’s momentum for sustained non-inflationary growth. The BSP remains strongly committed to achieving the inflation targets over the medium term and stands ready to respond to any emerging risks that could threaten the attainment of these targets.
For the consideration of His Excellency.
AMANDO M. TETANGCO, JR.
28 January 2016