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Inflation Accelerates in Q2 2008


The BSP announced today the publication of the 27th issue of the quarterly BSP Inflation Report covering the period  April-June 2008. 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).  The BSP Inflation Report is 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 2008:

  • Inflation accelerated in Q2 2008.  Against the background of a continuous surge in energy and food prices, average headline inflation rose to 9.7 percent from 5.6 percent in the previous quarter.  The strong price dynamics of food and oil have also started to feed into other prices, as evident in the uptrend in core inflation.  Core inflation, which measures the underlying trend in inflation by excluding specific food and energy items, accelerated to 6.2 percent during the review quarter from 4.1 percent in the previous quarter.
  • The BSP’s latest assessment is that inflation could settle above the 2008 and 2009 targets. Price pressures have increased even as they are projected to ease starting late 2008. This developed as concurrent and interrelated shocks to the economy—such as the persistent surge in oil prices and spikes in commodity prices—have contributed to elevated inflation readings.  The pass-through from global prices is continuing and the global non-oil commodity price hikes appear prolonged and are expected to take longer to unwind. Importantly, second-round effects have set in, as evident in the surge in core inflation, and a rise in inflation expectations has been perceptible from surveys and term spreads.
  • Gross Domestic Product (GDP) grew at a slower pace of 5.2 percent in Q1 2008 compared to the expansion posted in the previous quarter and the comparable period last year. On the expenditure side, household spending and capital formation slowed down while government consumption declined.  On the production side, all major sectors expanded at a slower pace relative to both year-ago and quarter-ago levels. Meanwhile, rising fuel costs moderated the demand for energy-related and -intensive goods, with electricity consumption by residential consumers declining and vehicle sales slowing down. Moreover, the US economic slowdown has resulted in reduced Philippine exports.  Employment conditions have also weakened while business and consumer confidence have turned more cautious. Appliance sales, on the other hand, grew strongly during the quarter.
  • Financial markets were affected by heightened risk aversion brought about by worries over the global economy, as well as rising inflation. The peso weakened, activity in the stock market turned bearish, and secondary market yields for government securities rose across all tenors in Q2 2008 on news of an imminent recession in the US and the resulting slowdown in the broader global economy, and the continuing surge in international oil and food prices.
  • Higher oil and non-oil commodity prices have resulted in an “income crunch” across the world. The recent run-up in commodity prices comes in the face of the weakness in US economic activity and global financial market volatility, which are already causing a slowdown in global expansion.  Emerging market economies, however, have so far been less affected by the financial market turbulence and have continued to grow at a strong pace—particularly China and India—although economic activity is beginning to moderate in other Asian economies.  
  • Domestic liquidity growth increased in March.  Domestic liquidity or M3 increased in March.  The growth of credit extended to the public and private sectors continued to be strong, although slightly lower than in the preceding month.
  • The BSP hiked policy rates during the quarter.  After keeping monetary policy settings steady in April, the Monetary Board hiked by 25 basis points in June the BSP’s key policy interest rates to 5.25 percent for the overnight borrowing or reverse repurchase (RRP) rate and 7.25 percent for the overnight lending or repurchase (RP) rate.  The BSP believed that there were already indications of supply-driven pressures beginning to feed into generalized pricing behavior.  Given the early evidence of second-round effects, as indicated in the uptrend in core inflation, rising prices of services, upward shift in inflation expectations, and the earlier-than-expected wage adjustments, the Monetary Board recognized the need to act promptly to rein in inflationary expectations.  Since monetary policy affects economic variables with a time lag, the policy measure undertaken is expected to help address risks to inflation in 2009.  

[Subsequently, in July, the Monetary Board raised the BSP’s key policy rates by 50 basis points to 5.75 percent for the overnight borrowing or RRP facility and 7.75 percent for the overnight lending or RP facility. The Monetary Board believed that a more decisive monetary action was necessary as price pressures have increased and second-round effects have already set in.]

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