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BSP Releases Inflation Report for the Third Quarter of 2004


Bangko Sentral ng Pilipinas Governor Rafael B. Buenaventura announced today the publication of the twelfth issue of the quarterly BSP Inflation Report for the period July-September 2004. The full text of the Inflation Report has been released in electronic PDF format from the BSP website. The BSP Inflation Report is being published as part of the BSP’s transparency mechanism under inflation targeting to convey to the public the overall thinking and analysis behind the BSP’s decisions on monetary policy. 

The following are the highlights of the latest Inflation Report:

Pressures on consumer prices remained evident in the third quarter, as the uptrend in inflation continued to be driven by food inflation and energy-related non-food inflation.  Food prices, particularly those for meat, fish and corn remained high due largely to higher input costs. Similarly, higher inflation rates were noted for all major non-food CPI items except clothing as well as housing and repairs. The increase in non-food inflation appears to be mostly energy-related, a result of rising oil prices in the international market.  Transport and communication along with fuel, light and water posted double-digit inflation rate and contributed about half of the total non-food inflation and little more than one-fifth of total headline inflation for the period.

Overall economic activity continued to be fairly brisk as aggregate demand continued to be fueled by strong private consumer spending, along with increased activity in exports and construction.  However, the double-digit unemployment rate, the modest improvements in bank lending, money demand and investment spending indicate the presence of some slack in the economy.

National Government’s (NG) fiscal position was on track in the first eight months. The cumulative deficit level for January-August was P111.0 billion, 3.1 percent lower than the level in the same period a year ago and 56.2 percent of the target level for 2004.  Revenue collections rose by 13.2 percent year-on-year while government spending rose by only 9.7 percent.

Domestic market interest rates were generally higher during the third quarter. The rise in T-bill rates reflected market concerns over the government’s fiscal position, rising inflation given developments in oil prices and expectations of further hikes in the US federal funds target rate. 

The peso weakened slightly in the third quarter. The depreciation of the peso against the US dollar was due mainly to seasonal factors, including the increased corporate dollar demand to cover import requirements and end-quarter debt obligations. The peso was also weighed down by concerns over the country’s fiscal situation and the surge in world oil prices, which fueled market fears of higher inflation and interest rates.  

The BSP has kept its policy interest rates unchanged during the quarter despite perceptions of a need to tighten monetary settings against a backdrop of rising inflation. Monetary authorities believe that ongoing pressures on inflation remain largely rooted in the impact of supply shocks.  Such factors also remain the principal source of risk to the inflation outlook.  Historical experience also suggests that headline inflation tends to quickly revert to trend following episodes of supply-side pressures.  Thus, headline inflation is expected to rise above the 4-5 percent target for 2004 and 2005 as the full impact of the supply factors is felt but will revert to the 4-5 percent target by 2006. 

The Monetary Board’s decision to stay its hand reflects its assessment that the ongoing supply-side pressures are largely non-permanent. They cannot be directly addressed through monetary action, and that to date there has been no preponderance of evidence suggesting demand-driven inflationary pressures or second-order inflationary effects from ongoing supply shocks.

In addition, the dominant role of supply-side developments in the inflation outlook implies inflation can be best mitigated through the appropriate supply-side (i.e., non-monetary) policy measures that would facilitate timely importation, distribution and delivery of key commodities. To this end, the BSP has continued to articulate its support for the use of such measures to address and accordingly has made representations with relevant government agencies on the matter.

This does not mean, however, that monetary policy will not be used to deal with inflationary pressures in the near future.  The BSP recognizes the risk of a sustained period of rising oil prices, which could lead to economic dislocations in the form of reductions in domestic demand and self-sustaining inflation pressures reinforced by public expectations of persistently high inflation.  Monetary action will thus become necessary when the available evidence begins to point more strongly to inflation pressures that are over and above those generated by ongoing supply shocks, or to emerging demand-side pressures on prices.  Authorities also recognize the risk of prolonged exchange market pressure caused by narrowing nominal interest differentials, ample liquidity among banks,  and negative market sentiment that could feed into inflation and inflation expectations.

In the meantime, the BSP will continue to assess economic and financial developments for indications of potential threats to the inflation target and, if necessary, undertake a well-timed policy adjustment.

Download Inflation Report for Third Quarter 2004

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