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Inflation Dropped to 5.4 Percent in October


We are pleased to note that inflationary pressures remained subdued in October, with the year-on-year inflation rate decelerating to 5.4 percent in October from 5.7 percent in September. This brings the average inflation rate for the first ten months of 1999 to 7.2 percent. The October inflation rate was significantly below the 5.8 percent revised inflation rate assumption for the month under the current stand-by program with the IMF.

The inflation rates for all commodity groups registered a year-on-year deceleration in October, except for fuel, light and water as well as services. The inflation rate for food, beverages and tobacco (FBT) slowed down to 2.8 percent from 3.6 percent in September. For food alone, the inflation rate was 2.7 percent in October, comparing favorably to the 3.3 percent recorded in September. This can be traced mainly to the marked recovery of the agricultural sector as well as the ongoing harvest season, which helped bring down the price of rice and other food products. However, the series of adjustment in oil prices pushed up the inflation rate for fuel, light and water to 8.6 percent from 8.0 percent in the previous month. The recent increase in transport fares accounted largely for the rise in the annual average prices of services to 11.4 percent in October from 10.2 percent in the previous month.

The month-on-month inflation rate also registered a deceleration to 0.3 percent in October from 0.5 percent in September as food prices continued to trend down. Month-on-month inflation rates for FBT declined by 0.1 percent from positive 0.5 percent in September. In particular, the price of rice dropped by -1.0 percent from zero growth last month.

On the demand side, inflationary expectations due to pressures arising from the recent increases in pump prices of oil and in transport fares as well as the clamor for wage adjustments were tempered by continued caution exercised by authorities in the conduct of monetary policy. Since 6 July 1999, the Bangko Sentral had maintained a neutral policy stance by keeping its overnight borrowing and lending rates at 9 percent and 11 percent, respectively. However, last Friday, the Monetary Board approved a 25-basis point cut in the BSP’s overnight borrowing rate. This reduction is aimed at influencing a reduction in long-term interest rates as well as encouraging banks to accelerate lending in order to rejuvenate demand and boost economic activities. The latter, in turn, will help tame further inflationary pressures from the spillover effects of the recent price adjustments.

The monetary authorities will continue to maintain a cautious yet flexible stance in monetary management to contain any undue upward pressure on prices. Moreover, the BSP will maintain comfortable margins on the monetary ceilings under the IMF program in line with the broader policy thrust of maintaining price stability consistent with the economy’s revised target output growth of 3.5-4.0 percent.

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