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Favorable Price Conditions Continue in Q2 2012


The BSP announced today the publication of the 43rd issue of the quarterly BSP Inflation Report covering the period April - June 2012. The full text 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 to 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 2012 BSP Inflation Report:

  • Headline inflation eases further due to lower food inflation. Average inflation, using the 2006-based consumer price index (CPI) series, decelerated to 2.9 percent in Q2 2012 from the quarter-ago and year-ago rates of 3.1 percent and 5.0 percent, respectively. This was due largely to slower price increases in key food items, notably rice, corn, meat, and oils, given favorable domestic supply conditions. Similarly, lower inflation rates for electricity, gas, and other fuels as well as transport helped pull down inflation. Meanwhile, core inflation rose to 3.7 percent in Q2 2012 from 3.5 percent in the previous quarter, but remained in the lower half of the target range for headline inflation. Two out of the three alternative measures of core inflation estimated by the BSP also increased relative to the rates registered in the previous quarter. 
  • Domestic demand conditions remain firm. The Philippine economy posted a higher-than-expected growth of 6.4 percent in Q1 2012, stronger than the 4.0 percent (revised) posted in Q4 2011. The expansion was driven mainly by the steady growth in household consumption, increased government spending, and higher exports. Other indicators also suggested continued improvements in domestic demand during the second quarter. Energy and vehicle sales have picked up. Real estate activity has also remained brisk, while the latest purchasing managers’ index (PMI) pointed to expanding economic activity, particularly in the manufacturing and trade sectors. Moreover, business confidence has improved on expectations of stronger demand. Steady improvements in employment conditions as well as the low inflation environment are expected to support consumer spending in the months ahead.
  • The global economy loses momentum. In the July 2012 World Economic Outlook update, the IMF downgraded slightly its projections for global economic growth for both 2012 and 2013, reflecting the continued weakening of growth prospects in the euro area as well as their potential spillovers to the rest of the world through trade and financial markets. The growth momentum in major emerging economies, particularly China and India, appears to have waned as well owing to the more subdued external environment and softening domestic demand partly due to monetary policy tightening over the past year.  Similarly, the recovery in the US has remained tentative as the insufficient progress in developing the country’s medium-term fiscal consolidation plan has limited scope for further stimulus. Easing global commodity prices could lend support to global economic activity for the remainder of 2012 and 2013, although international food prices remain at risk of rising due to the prolonged dry spell in the US.
  • Global financial conditions weaken on financial market strains in Europe and signs of a more protracted global economic slowdown. Uncertainty over the resolution of the sovereign debt and banking problems in Europe, talks of Greece’s potential exit from the European Union, and the credit downgrade of various European banks fueled risk aversion during the quarter. Disappointing economic data in the US and China also contributed to growing concerns on the fragility of the global recovery, further dampening investor confidence. Nonetheless, the local bourse rallied on expectations of robust domestic corporate earnings and the release of favorable data on domestic output growth, fiscal performance, and inflation. The peso likewise continued to appreciate, buoyed by steady forex inflows from OF remittances and portfolio investments. Meanwhile, spreads on Philippine debt widened due to heightened global risk aversion. Growth in domestic liquidity remained strong, supported by brisk credit activity.
  • The Monetary Board (MB) maintains policy rates during the quarter. During its monetary policy meetings on 19 April and 14 June, the MB kept policy rates at 4.0 percent for the overnight borrowing or reverse repurchase (RRP) facility and 6.0 percent for the overnight lending or repurchase (RP) facility. The MB’s decision was based on its assessment that a benign inflation outlook and robust domestic growth provided sufficient room to keep policy rates unchanged. The MB was also of the view that past policy adjustment should be given sufficient time to gain traction in the economy. 
  • The favorable inflation environment provides room for policy support to guard against the risks associated with the continued global slowdown. Baseline forecasts indicate a benign inflation path, with the risks to the inflation outlook tilted slightly to the downside given weaker global demand conditions and the associated lower risk of a significant upturn in commodity prices in the near term. Inflation expectations also appear to be firmly anchored at levels consistent with the inflation target over the policy horizon. Although domestic demand conditions remain strong, the prospects for global economic growth have weakened. Monetary policy can, therefore, act preemptively should that be necessary to ward off risks associated with the continued global slowdown to keep the economy on a steady course. At the same time, the BSP remains watchful against upside risks to inflation, including the expected pass-through of electricity rate hikes, prolonged dry weather conditions in the US, and sustained domestic demand growth. Going forward, the BSP will continue to assess the evolving balance of risks to both inflation and output to ensure that monetary conditions remain supportive of sustained non-inflationary economic growth.

[On 26 July 2012, the Monetary Board decided to reduce its key policy interest rates by 25 basis points to 3.75 percent for the RRP facility and 5.75 percent for the RP facility. The interest rates on term RRPs, RPs, and the special deposit account (SDA) facilities were also reduced accordingly.]

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