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Headline Inflation Unchanged, Core Inflation Slows Down in October


As reported today by the National Statistics Office (NSO), headline inflation of 7.0 percent in October was within the BSP’s forecast of 6.5-7.0 percent for the month.  The latest inflation outturn is consistent with the BSP’s expectations of easing price pressures for the remaining months of 2005, based on continuing trends for easing food prices in the ongoing harvest season and also relative stability in the foreign exchange rate. At the same time, the further slowdown in core inflation points to the continued absence of demand-based pressures on consumer prices. The steady path of headline inflation and the continued deceleration in core inflation will help stabilize the public’s inflation expectations and provide a counterbalance to the expected impact of high oil prices and the Reformed Value Added Tax (RVAT) on consumer prices.   

Nevertheless, the BSP remains forward-looking in its conduct of monetary policy, and the assessment of the policy stance continues to be firmly focused on the outlook for inflation. Latest forecasts continue to suggest a possible breach of the inflation target in 2006 and 2007 due to possible second-round effects coming from supply-side pressures, notably those associated with oil prices and the RVAT.  In addition, there are other corollary risks to the inflation outlook.  Deviations of actual inflation from the Government target over a prolonged period pose a considerable risk to inflation expectations, in that the public may begin to expect inflation to remain persistently well above the targets announced by the Government. An added concern is the continued rapid growth in domestic liquidity, which not only can contribute to potential volatility in the foreign exchange market but can also fuel demand-based price pressures over time as slack in the economy gradually disappears.  On the whole, such an outlook supports the need for continued caution in formulating the monetary policy stance. 

Against this backdrop, the BSP will continue to pay close attention to the evolving conditions for prices and output in the months ahead, in order to assess the appropriate response to the various risks to inflation.  Given the well-known lags in the impact of monetary policy on inflation and the economy as a whole, policy actions will continue to be aimed at protecting the Government’s inflation target for 2007 by managing inflation expectations and keeping overall growth in liquidity in check.

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