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BSP Releases Inflation Report for the Fourth Quarter of 2003


Bangko Sentral ng Pilipinas Governor Rafael B. Buenaventura announced today the publication of the ninth issue of the quarterly BSP Inflation Report covering the period October-December 2003. The full text of the Inflation Report has been released today in electronic format (as a PDF file) and may be downloaded from the BSP website. A print version will be made available on 20 February 2004. The BSP Inflation Report is being published as part of the BSP’s transparency mechanisms under inflation targeting and to convey to the public the overall thinking and analysis behind the BSP’s decisions on monetary policy.

The following are the highlights of the BSP Inflation Report for the Fourth Quarter 2003:

Headline inflation was moderately higher in the fourth quarter of 2003, driven largely by movements in prices for food items such as corn, dairy products, fish, fruits and vegetables. Meanwhile, estimated core inflation rates remained close to the headline rate but displayed a gradual uptrend, owing mainly to price changes in services, particularly, education, housing and health services.

The overall pace of economic activity continued to be driven by domestic factors in light of the weak performance of the external trade sector. Aggregate demand sustained its momentum owing to strong private consumer spending, investment spending and a slower decline in government consumption. Nevertheless, other economic indicators pointed to a number of soft spots in domestic demand, implying downside risks to overall economic activity going forward.

Money and credit demand maintained its modest growth in the fourth quarter. The average year-on-year growth in domestic liquidity or M3 for October-November was steady at an average of 3.6 percent also posted in the third quarter. Growth in commercial bank lending fell to a preliminary average of 2.6 percent in October-November 2003 from a 3.8-percent average in the third quarter of 2003.

The fiscal position of the National Government (NG) remained on track vis-à-vis the country’s fiscal program. The NG posted a lower-than-programmed budget deficit in January-November due largely to substantial increases in revenues and reduced fiscal spending. Preliminary full-year figures indicate that the deficit is comfortably below the target for 2003.

A moderate to strong economic recovery lies ahead for the major economies, implying firmer prospects for external demand in the Philippines. Stronger economic performance is particularly evident in the United States, where recovery has been accelerating on the basis of record growth in output in the third quarter. Gains in performance in the euro area and Japan have been equally encouraging but slightly less brisk. In response, the major central banks have maintained a wait-and-see attitude and kept their policy rates steady.

Looking ahead, inflation is expected to remain manageable over the policy horizon, with a moderate increase consistent with stronger aggregate demand. Average headline inflation is expected to rise moderately in 2004-2005, in consonance with stronger aggregate demand conditions and the moderate influence of supply-side factors. Nonetheless, inflation is expected to continue to stay in line with the Government target of 4.0-5.0 percent for 2004 and 2005.

Several factors pose upside risks to the inflation outlook. Such risks include the possible upward pressures on the exchange rate due to financial market concerns over domestic political conditions in the run-up to the May 2004 presidential elections. 

Against a backdrop of manageable inflation and downside risks to output, the stance of monetary policy must continue to recognize the liquidity needs of the economy, but remain mindful of the risks to inflation. Continuing evidence of benign inflation and downside risks to the overall state of economic activity over the next two years argue for maintaining the policy stimulus to the real sector. However, considerations for monetary easing must be weighed against the risks to the inflation outlook, which include the resurgence of pressures in the foreign exchange market. Decisions on the monetary policy stance will continue to carefully strike a balance between providing adequate liquidity to support growth in domestic demand and guarding against the potential risks to consumer prices.

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