The Inflation Target

The Development Budget and Coordination Committee (DBCC), an inter-agency economic planning body together with the BSP sets the annual inflation targets. The government's inflation target is defined in terms of the average year-on-year change in the consumer price index (CPI) over the calendar year. The inflation targets have been set at 4.0 percent with a tolerance interval of + 1.0 percentage point for 2008 and 3.5 percent with a tolerance interval of + 1.0 percentage point for 2009. The BSP makes the announcement of the inflation target two years in advance. The inflation target for 2008 was announced in December 2006 while the inflation target for 2009 was announced in December 2007.

Inflation targeting is an approach to monetary policy that involves the use of a publicly announced inflation target set by the Government, which the BSP commits to achieve over a two-year horizon. Promoting price stability is the BSP's main priority, and the target serves as a guide for the public's expectations about future inflation, allowing them to plan ahead with greater certainty.

In its most recent assessment of the inflation environment, the BSP noted that the balance of economic evidence supports an unchanged policy setting. The prevailing combination of generally favorable supply-side and demand-side factors should help stabilize inflation expectations in the near term. In particular, the recent easing of energy prices, the strengthening of the peso, and the ongoing harvest season alongside normal weather conditions are likely to hold back cost-side inflationary pressures. Equally important, the deceleration of liquidity growth and the continued easing of core inflation imply a relative absence of demand-based inflation pressures. This is consistent with the observed slowdown in aggregate demand, particularly in consumer spending which remains the main driver of economic growth.

Nevertheless, the risks to inflation still remain. The continued tightness in surplus global oil production capacity amid strong demand raises the possibility that global energy prices may surge again and create uncertainty for the inflation outlook. Potential shifts in the public's inflation expectations can also become a risk as inflation remains higher relative to the government target. At the same time, the possibility of second-round effects on wage-setting and the presence of ample liquidity in the financial system could affect the inflation outlook.

The BSP remains fully committed to achieving the Government's inflation target through appropriate adjustments in its monetary policy instruments. Over the policy horizon, the stance of monetary policy of the BSP will continue to emphasize caution with respect to the risks to price stability.