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Inflation Decelerates Further in Q2 2009


The BSP announced today the publication of the 31st issue of the quarterly BSP Inflation Report covering the period April-June 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 thinking and analysis behind the Monetary Board’s decisions on monetary policy. 

The following are the highlights of the Q2 2009 BSP Inflation Report:

  • Inflation continues to decline. Headline inflation was lower in Q2 2009 compared to the previous quarter, as price pressures continued to abate. The downtrend in headline inflation was due mainly to lower food inflation as domestic and global supply conditions improved.  In addition, fuel inflation was negative from the strong base effects following the very high kerosene and LPG prices in the previous year.  Core inflation continued to moderate in the second quarter, reflecting soft demand conditions. Meanwhile, inflation expectations remained well anchored, with both the BSP and private sector surveys indicating expected inflation falling within the target ranges for 2009 and 2010.
  • The domestic economy faces strong headwinds from the global downturn. Economic growth in the first quarter showed a sharper-than-expected slowdown, reflecting the negative contributions of exports and gross capital formation, as well as the significantly lower growth of personal consumption expenditures. Various leading demand indicators, including the sustained drop in industrial energy sales and low capacity utilization in the manufacturing sector, continued to suggest weak economic activity through the second quarter of 2009.
  • Financial markets appear to be stabilizing, albeit at low levels. Supported by the perception that the global economic downturn is bottoming out, the Philippine Stock Exchange Composite Index (PSEi) surged in the second quarter, posting an average of 2,310.3 index points, higher by 21.9 percent than the level in the previous quarter. Likewise, debt spreads narrowed as global financial markets showed incipient signs of stabilizing as aggressive policy measures gained traction and investor risk appetite improved. However, in the foreign exchange market, the peso depreciated slightly during the quarter due to weaker domestic growth prospects, widening fiscal deficit, and the political noise created by the proposed move to amend the constitution.
  • Domestic liquidity and credit expand anew. The growth in domestic liquidity was mainly driven by the increase in net foreign assets (NFA) of depository corporations as the BSP continued to build up its international reserves, while banks reduced their foreign liabilities as they paid off maturing obligations.  Meanwhile, outstanding loans of commercial banks continued to post a double-digit expansion even as credit standards remained basically unchanged in the second quarter relative to the previous quarter. 1/   
  • Domestic interest rates decline. Interest rates decreased in Q2 2009 relative to the previous quarter’s levels as market sentiment turned more favorable and inflation conditions improved. The secondary market yield curve for government securities shifted downward in Q2 2009 as lower inflation expectations drove down interest rates across all tenors.   Similarly, interest rates on bank loans went down, indicating that banks passed on partially to their borrowers the BSP’s cuts in policy rates.
  • The BSP reduces its key policy interest rates further by another 50 basis points in Q2 2009, bringing the cumulative reduction to 175 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 over the course of the policy horizon. Inflation pressures are expected to remain subdued, given expectations of weaker global and domestic demand conditions and a low probability of a significant near-term recovery in commodity prices.
  • The latest inflation forecasts continue to show subdued price pressures, with headline inflation expected to settle at around the middle of the target range for 2009 and at the lower bound of the target range for 2010. On balance, downside pressures on prices predominated due mainly to expectations of a marked deceleration in global economic activity which is expected to continue to dampen imported inflation and inflation expectations, and weaker domestic demand conditions. However, there are upside risks that the unprecedented large stimulus programs in the advanced economies could exert inflationary pressures in the medium term and global commodity prices, particularly oil, could rebound.
  • Monetary policy will continue to provide support to economic activity to the extent that the inflation outlook allows.  The decision to provide additional monetary stimulus will be carefully considered, taking into account the significant monetary easing that has already taken place since December 2008, with key policy rates being reduced and liquidity provision being undertaken through lower reserve requirements, a larger rediscounting budget, and easier access to the rediscounting facility. With considerable monetary stimulus already in place, and the implementation of fiscal action already in the pipeline, the BSP believes that prevailing monetary settings are appropriately calibrated to the inflation outlook and domestic demand. Going forward, the BSP will continue to pay close attention to signs of global demand recovery as well as to a possible build-up in commodity price pressures over the medium term, with a view to undertaking timely action towards a non-inflationary recovery in economic activity.

[On 9 July 2009, the Monetary Board reduced the RRP and RP rates by 25 basis points to 4.0 and 6.0 percent, respectively. Given the continued benign 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.]


1/   From preliminary results of the Q2 2009 BSP Senior Bank Loan Officers’ Survey.  Q1 2009 results indicated that overall credit standards tightened somewhat in Q1 2009 relative to Q4 2008.

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