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Monetary Board Maintans Policy Settings in Q4 2010


The BSP announced today the publication of the 37th issue of the quarterly BSP Inflation Report covering the period October-December 2010. 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 2010 BSP Inflation Report:

  • Inflation decelerates further in Q4 2010 and average inflation for 2010 falls within target. Headline inflation for 2010 averaged 3.8 percent, well within the Government’s target range of 3.5-5.5 percent. In Q4 2010, headline inflation eased to 2.9 percent from 3.8 percent in Q3 2010 as a result of lower food and non-food inflation. Food inflation declined, with most major food groups posting lower inflation rates. Non-food inflation also went down, influenced mainly by lower light inflation due to the reduced cost of power supply. Similarly, core inflation decreased to   3.4 percent from 4.0 percent in the previous quarter, due largely to lower meat inflation and power rates.
  • Domestic demand momentum remains relatively strong. Output growth slowed down in Q3 2010 but continued to be above trend, with the real gross domestic product (GDP) growing by 7.5 percent in the first three quarters of the year. On the production side, the steady growth in services and industry offset the contraction in agricultural output in Q3 2010, which was due largely to the impact of El Niño. On the expenditure side, growth was led by the sustained recovery in external trade, consumer spending, and investments. Other demand indicators likewise reflected the strength of the economy. Capacity utilization and production in the manufacturing sector remained high while energy consumption continued to post solid growth. Business confidence and consumer sentiment for the current quarter set new record highs while sales of passenger cars and commercial vehicles continued to grow.
  • Global economic recovery continues in Q3 2010 but the multi-speed nature of recovery will likely extend going forward, with dynamic emerging market (EM) economies leading global growth. At the same time, bullish domestic financial market sentiment continued in Q4 2010, supported by ample liquidity in the system and continued favorable prospects for output growth. Strong economic data on the domestic and international fronts likewise contributed to the upbeat mood in the equities market, the further narrowing of sovereign debt spreads, and the appreciation trend of the peso during the quarter. Bank lending also continued to grow, indicating that ample funds are available to support the funding requirements of the economy. Results of the Q4 2010 Senior Bank Loan Officers’ Survey showed that most banks had generally unchanged credit standards for the seventh consecutive quarter starting Q2 2009. However, lingering uncertainties over the sovereign debt problem in Europe as well as asset price bubble and overheating concerns in fast-growing EM economies dampened investor confidence.
  • The Monetary Board (MB) maintained the BSP’s policy rates in Q4 2010, noting that current monetary settings represent a sound policy balance that is supportive of both inflation control and economic expansion. The Board noted that inflation projections continued to indicate a manageable inflation environment, with inflation settling within the target ranges for 2010- 2012. The forecasts were also supported by well-contained inflation expectations based on the results of surveys of private economists while various measures of core inflation suggested that underlying price pressures are not generalized. At the same time, growth of credit and liquidity continued to be broadly consistent with the pace of economic expansion.
  • However, the BSP’s assessment of current price trends and risks to future inflation suggests that the balance of risks to the inflation outlook is tilted slightly to the upside. Solid domestic demand conditions point to the likelihood of stronger inflationary pressures over the policy horizon. While the rebound in investment is likely to add to productive capacity, and lead to higher potential output over the medium term, a stronger momentum in demand growth could add to inflationary pressures in the short term. Moreover, potential supply-side pressures pose upside risks to the central inflation projection. These could come from higher global food prices, persistent increases in world oil prices, the potential impact of weather disturbances on agricultural production, and further adjustments in domestic rice prices and electricity charges. Nevertheless, the downside risks relating to the slower-than-expected recovery of the global economy and to the continued stability of the peso could also help temper the impact of imported inflation.
  • The BSP remains vigilant against any emerging risks to the inflation outlook and is ready to adjust policy settings if and when needed to ensure that future inflation will remain consistent with the medium-term target and that domestic liquidity conditions will remain supportive of sustainable economic growth.

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