The BSP announced today the publication of the twenty-third issue of the quarterly BSP Inflation Report covering the period April-June 2007. The full text of the Inflation Report has been released in electronic format (as a PDF file) on the BSP website (http://www.bsp.gov.ph/publications/regular_inflation.asp). A printed version will be available by mid-August 2007. The BSP Inflation Report is being published as part of the BSP’s efforts to further improve the transparency of monetary policy under inflation targeting and convey to the public the overall thinking and analysis behind the Monetary Board’s decisions on monetary policy.
The following are the highlights of the BSP Inflation Report for Q2 2007:
- Inflation continued to ease in Q2. The downward path of inflation was sustained by stable food prices and a strong peso even as the demand for goods and services continued to show moderate improvement.
- Domestic interest rates eased further in Q2. Ample liquidity and lower inflation helped bring down primary market yields. Bank lending rates also went down further.
- Domestic liquidity growth decelerated but remained strong. Robust dollar inflows from remittances, exports, and investments sustained the increase in net foreign assets. Bank lending may have reached a respectable growth given the continued broadening of financial markets, which made non-bank sources of financing increasingly available to the private sector.
- The peso’s sustained appreciation against the US dollar reached a seven-year high. Positive market sentiment on the back of the country’s continuing solid macroeconomic fundamentals invited stronger dollar inflows which, in turn, helped strengthen the local currency.
- Sustained global economic growth is fuelling inflationary pressures. This is mainly coming from the growth in major economies such as the Euro area and Japan, along with the brisk pace of expansion in China and India. The US economy also grew moderately as the slowdown in its housing sector continued to dampen overall performance.
- As in the previous quarter, the central projection for inflation remains below the 4.0-5.0 percent range in 2007 and within the 4.0 percent + 1.0 percentage point target for 2008. The near-term outlook for inflation remains subdued and unchanged from the previous report. On the demand side, several indicators exhibit a broad upward trend while some posted declines, whereas the continued ample supply of food supports relatively tame price pressures from the supply side. Risks to the inflation outlook remain, such as volatile oil prices, strong liquidity growth, and possible wage increases.
- The Monetary Board kept policy rates unchanged during the quarter but introduced new measures to mop up excess liquidity. The inflation readings over the policy horizon remained benign. However, the risk posed to future inflation by the continued strong growth of domestic liquidity prompted monetary authorities to take preemptive steps to absorb liquidity. Effective 10 May 2007, the BSP encouraged government-owned and controlled corporations to deposit funds with the BSP, allowed BSP-supervised trust entities to deposit funds with the BSP; and allowed special deposit account (SDA) placements of banks to the BSP as compliance with the liquidity floor requirement for government deposits.
- Going forward, the BSP will continue to be closely attentive to emerging risks to the inflation outlook, with a view to ensure that its monetary policy stance remains consistent with price and growth objectives. The BSP’s recent twin moves on 12 July 2007 to lift the tiering system and reduce the policy rates, which when combined are considered neutral relative to future inflation and output, are in line with this policy strategy.