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Inflation Expected to Decline Over the Next Two Years

07.02.2008

The Bangko Sentral ng Pilipinas indicated recently that inflation will reach double-digits beginning in June this year.  This forecast is fully consistent with the BSP’s view of a hump-shaped path for inflation in 2008 and 2009.  The BSP's emerging baseline forecasts, which reflect more recent data on inflation and output, suggest that average inflation in 2008 will reach 7.0-9.0 percent, which is above the Government’s target.  However, for 2009, average inflation is projected to decline to 4.0-6.0 percent.  The peak of the inflation path is expected to occur in the third quarter of 2008, to be followed by a steady decline towards single-digit levels in 2009.  In the absence of persistent sharp surges in oil prices, base effects should produce lower inflation rates next year and beyond.  Meanwhile, favorable projections for global and domestic agricultural output should help to stabilize food prices. The slowdown in global economic activity is also expected to contribute to moderating demand for oil and food products, which should enable an easing in imported commodity prices.

Nevertheless, the Monetary Board believes that there are already indications that supply-driven pressures are beginning to feed into demand.  With the early evidence of second-round effects, the Monetary Board has acted to promptly rein in inflationary expectations and address risks to inflation in 2009, since monetary policy affects economic variables with a time lag. 

Consistent with its primary mandate to maintain price stability, the BSP remains committed to pursuing the necessary monetary action to address the risks to inflation and inflation expectations and ensure the achievement of the BSP’s price stability objective.     

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