In connection with the BSP’s inflation targeting approach in the conduct of monetary policy, the Development Budget and Coordination Committee (DBCC), the Government’s inter-agency economic planning body, under DBCC Resolution No. 2006-09 dated 29 November 2006, has approved the inflation target for 2008 of 4.0 percent, plus or minus 1 percentage point. This is in line with an earlier decision of the Committee, under Resolution No. 2006-08 dated 8 November 2006, to respecify the Government’s inflation target from a range target to a point target with a tolerance interval of ± 1 percentage point.
The shift from a range inflation target to a point target with a tolerance interval effectively widens the BSP’s target band. A broader target band is seen to provide added flexibility to monetary authorities in steering inflation, particularly in the Philippine setting where consumer prices are subject to large supply shocks because of the sizeable share of food items in the consumer basket. It helps ensure that the design of the inflation target is more consistent with the country’s economic circumstances, and safeguards the credibility of the inflation targeting framework. It also helps align monetary policy practices in the Philippines with those in other inflation targeting countries. Most inflation targeting countries (such as the UK, Canada, New Zealand, Indonesia, and Mexico) employ ranges for headline inflation at two percentage points or more, formulated as a target rate plus or minus one percentage point.
The change in the form of the inflation target supports the efforts of the BSP to enhance the operational framework for monetary policy. Earlier, the Monetary Board approved the lengthening of the interval between monetary policy meetings from four to six weeks and the shortening of the publication lag of the highlights of the policy meetings from six weeks to four. The longer interval between policy meetings will allow the Monetary Board to consider a wider set of macroeconomic data in its policy discussions and have more time for analysis and evaluation of the economic evidence. Meanwhile, the shorter publication lag of the highlights of policy meetings will further enhance the transparency of monetary decision-making and convey to the public the Monetary Board’s overall thinking about its policy stance in a more timely manner.
Inflation targeting is an approach to monetary policy that involves the use of a publicly announced inflation target set by the Government. In the case of the Philippines, the BSP commits to achieve the inflation target 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 formulate their plans with greater certainty.
In its most recent assessment of the inflation environment, the Monetary Board noted that the improving outlook for inflation, given prevailing demand and supply-side conditions, provides some policy flexibility. Emerging trends continue to show a generally declining path for inflation, with average inflation for 2007 expected to fall within the 4-5 percent target in the absence of further adverse shocks. Latest forecasts also indicate that average inflation in 2008 is likely to be in line with the 4.0 percent ± 1 percentage point target. Recent benign readings in inflation, however, do not mean that there are no price risks over the horizon. Upside risks to the inflation outlook, such as the volatility in world oil prices and the potential impact on food prices of a prolonged El Niño episode, remain. With these potential supply-side risks, the Monetary Board remains vigilant of any shift in the public’s inflation expectations. Monetary authorities will also continue to pay close attention to a possible excessive buildup in liquidity conditions that could lead to price pressures in the future.