The BSP announced today the publication of the 33rd issue of the quarterly BSP Inflation Report covering the period October-December 2009. 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 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 Q4 2009 BSP Inflation Report:
- Average inflation for 2009 falls within target range, even as Q4 inflation increases. Headline inflation for 2009 averaged lower at 3.2 percent, well within the Government’s target of 2.5-4.5 percent. Favorable developments in food and energy-related items in the first three quarters of 2009 sustained the inflation downtrend which started in Q4 2008. However, inflation rose in Q4 2009 as weather-related disturbances led to higher prices of food products and as the price of oil increased in the global market. Higher inflation path in Q4 was also partly statistical as base effects, which contributed to low inflation readings during the earlier part of the year, have started to diminish. Meanwhile, core inflation reflected a downtrend for five consecutive quarters starting Q4 2008 to reach 2.9 percent in Q4 2009, indicating modest demand-side price pressures.
- The prevailing inflation outlook likewise indicates within-target inflation over the policy horizon, with near-term price pressures expected to remain manageable. Inflation is expected to track a target-consistent path over the policy horizon, with the latest baseline inflation forecasts for both 2010 and 2011 only slightly higher than the forecast in the previous Inflation Report. Risks to domestic inflation are tilted slightly upwards. On the one hand, potential sources of domestic inflationary pressures include supply tightness in key agricultural products and the pending adjustments in domestic power charges. The impact of the El Niño weather conditions on domestic food supply could also add some pressure on inflation in the near term. On the other hand, downside price pressures are expected to stem from the modest improvement in domestic demand and well-contained inflation expectations. Large foreign exchange inflows, including from overseas Filipinos’ remittances and foreign investments, help stabilize the value of the peso and in the process, help contain price pressures from imported commodities.
- Global price developments relate mainly to the outlook for global economic activity and developments in world commodity prices. Global inflationary risks are expected to be manageable as some major central banks have signaled their strong commitment to safeguard price stability by preemptively considering the disengagement from crisis intervention measures. At the same time, economic fundamentals, such as moderate improvement in consumer demand, above-average inventory levels and elevated spare capacity are expected to weigh down on global price developments. However, an improvement in market sentiment may prompt a rebound in private demand for advanced economies and pose upside risks to global inflation. In addition, structural weaknesses in the investment and operational environment in the oil and agriculture sectors suggest a possible resurgence in commodity prices in the near term once global demand fully recovers.
- The economy continues to grow in Q4 2009, supported by a resilient domestic demand and the gradual recovery in global economic conditions. Latest demand indicators signaled a pick-up in demand activity starting Q4 2009, with vehicle and energy sales increasing and capacity utilization of manufacturing reaching its highest level since 2000. Strong demand from household combined with government spending provided support to the economy, leading to the expansion in real GDP by 1.8 percent year-on-year in the fourth quarter. At the same time, the world economy has shown signs of recovery, with leading indicators in the advanced and emerging economies in Q4 2009 pointing to a resumption of growth such as the return of substantial net capital inflows, resilient domestic demand, and strong recovery in external trade. Nevertheless, there remains uncertainty regarding the sustainability of future growth beyond the impact of the stimulus measures.
- There are clear signs that financial markets have normalized. Global financial market activity continued to be driven by growing confidence in the global economic recovery as the steady stream of mostly positive macroeconomic news reassured investors that the global economy had in fact turned around. Exceptionally low policy rates across the globe and fiscal stimulus packages in advanced economies continued to drive the post-crisis rebound in global equity markets. As global credit markets continued to normalize and credit spreads have stabilized, the risk of contagion from global financial stresses has markedly been reduced in domestic financial markets. Philippine sovereign debt spreads narrowed at the end of Q4 relative to the end of Q3 2009. The domestic equities market continued to post gains, and the peso appreciated against the dollar in the foreign exchange market in December 2009, brought about by the reflow of capital to emerging market economies and the inflow of OF remittances.
- The continued expansion in domestic liquidity provides support to the country’s growth requirements amidst challenging global economic conditions. Domestic liquidity grew steadily in Q4, fueled by the increase in net foreign assets. Meanwhile, net domestic credit growth reflected the slowdown in the economy, as the pace of credit to both the public and the private sector moderated. Commercial bank lending growth slowed down to single-digit levels starting in July 2009 as lending for production activities was pulled down by the contraction of lending to manufacturing, which, in part, reflected the negative impact of the global crisis on export demand. Latest data however, reflect some pick-up in bank lending, with the strengthening of lending for production activities. Reflecting ample supply of credit, preliminary survey responses of senior bank loan officers in Q4 2009 indicated that overall credit conditions remained stable.
- The within-target inflation outlook over the policy horizon, supported by well-contained inflation expectations, positive economic growth, and broad stability in domestic financial markets, all suggest that current policy settings remain appropriate. Going forward, the BSP is committed to undertake prompt policy action before inflation pressures begin to manifest, especially if supply-side risks to inflation become persistent. With the expected improvement in the domestic economy alongside the recovery in the global economy by 2010, the BSP will continue to review its support measures in line with its commitment to price stability. The decision to recalibrate the support measures of the BSP will depend on the underlying conditions in the economy, particularly the inflation outlook and expectations about inflation, as well as the speed of recovery in the domestic economy.
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