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Inflation Decelerates Further in Q1 2009


The BSP announced today the publication of the 30th issue of the quarterly BSP Inflation Report covering the period January-March 2009. The full text of the Inflation Report has been released in electronic format (as a PDF file) on the BSP website.  The BSP Inflation Report is published as part of the BSP’s efforts to 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 Q1 2009:

  • Inflation decelerates further in Q1 2009. Headline inflation was lower in Q1 2009 compared to the previous quarter, reflecting subdued price pressures as prices of food and energy-related items decreased. There have been further declines in domestic commodity prices as global prices, especially of energy products, responded to weaker global demand. Likewise, core inflation, which is indicative of underlying and broad-based price pressures, slowed down in the first quarter. 
  • Inflation expectations remain well anchored. The BSP’s survey of private sector economists indicated lower inflation expectations in 2009 compared to the previous quarter while expectations for 2010 remained broadly unchanged. 
  • Economic conditions generally weaken. Signs of moderation in economic activity were apparent based on the previous quarter’s national accounts as consumption slowed down, capital formation declined, and the growth of exports and imports contracted markedly.  First quarter 2009 leading economic indicators also showed the same trend. Capacity utilization and energy sales decreased while unemployment increased. Meanwhile, business and consumer surveys indicated continued bearish outlook for the first and second quarters.    
  • While there are some tentative signs that the current global economic down cycle may be nearing the bottom, forward momentum remains weak. Developments over the past three months, which show severe financial deleveraging and a more widespread downturn in many countries, indicate that the restoration of the global financial system to normalcy may take some time. Meanwhile, the fragile state of global financial markets continued to pose challenges to domestic financial markets. Local equity and foreign exchange markets showed signs of strains in the first quarter, even as volatility eased toward the end of the period.  
  • The peso weakens on a year-to-date basis. The peso depreciated against the US dollar in the first quarter as heightened risk aversion gripped Asian currency markets. In addition, concerns over the likelihood of deep contractions in advanced economies and the effect of weak global demand on the export-driven Asian economies put pressure on the peso during the quarter. Nonetheless, sustained overseas Filipino (OF) remittances as well as a generally improved market sentiment toward the latter part of the period eased the pressure on the peso to some extent.  
  • Meanwhile, domestic liquidity continues to grow strongly.  The double-digit growth of domestic liquidity reflected, in part, the preemptive measures taken by the BSP starting in the latter part of 2008, in addition to the reductions in policy rates. These included the reduction in the reserve requirement ratio by two percentage points, the increase in the rediscounting budget to P60 billion, and the liberalization of access to the rediscounting facility of the BSP.
  • Domestic interest rates decline. Primary and secondary market yields declined, influenced by the reduction in the BSP’s policy rates. Lending rates also declined, but to a lesser extent than the BSP policy rates, as banks passed on partially the reduction in policy rates.  There were findings of a moderate tightening in credit standards based on the first quarter preliminary results of the BSP’s Senior Bank Loan Officers’ Survey. Nonetheless, bank lending continued to grow at a solid pace.
  • With the favorable inflation outlook, the BSP acts preemptively on potential risks to growth and financial stability. The BSP lowered its policy rates by 75 basis points in the first quarter, bringing the cumulative monetary easing to 125 basis points since December 2008. The BSP’s decision to ease the monetary policy stance was based on the assessment that inflation would stay within target in the near term as inflation pressures are expected to remain subdued given the prospects of considerable economic slack in the coming quarters. 
  • Going forward, the latest inflation forecasts continue to show moderating price pressures, with inflation falling within the target ranges for 2009 and 2010. On balance, inflation risks are slightly skewed to the downside, with increasingly weaker global and domestic demand conditions and a lower probability of a significant near-term recovery in commodity prices. The narrowing output gap also suggests some moderation in demand-side price pressures while inflation expectations remain well anchored. Upside risks continue to revolve mainly around the volatility of oil prices and the exchange rate, as well as possible increases in utility tariffs and food prices.
  • The continued favorable inflation outlook provides scope for policy flexibility. This allows the BSP to balance price stability objectives with the need to support the financial system and the macroeconomy as economic headwinds continue. Monetary policy remains an important policy lever which could minimize any further corrosive feedback stemming from weakening economic and financial conditions. However, monetary policy cannot single-handedly limit the contractionary effects of the global crisis on the domestic economy. Monetary measures need to be complemented with other measures, including an appropriately more stimulative fiscal policy in supporting the economy through the downturn.

[On 16 April 2009, the Monetary Board reduced the RRP and RP rates by 25 basis points to 4.5 and 6.5 percent, respectively. Given the improved inflation outlook, the Monetary Board believed that there was room for further easing in the monetary policy stance, which should also provide support to financial markets and the real economy.]

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