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BSP Releases Inflation Report for the Second Quarter of 2004


Bangko Sentral ng Pilipinas Officer-In-Charge Armando L. Suratos announced today the publication of the eleventh issue of the quarterly BSP Inflation Report for the period April-June 2004. The full text of the Inflation Report has been released in electronic PDF format from the BSP website.  A print version will be available on 31 August 2004. The BSP Inflation Report is being published as part of the BSP’s transparency mechanism under inflation targeting and 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:

  • Inflation continued to pick up in the second quarter due to food prices.Headline inflation continued to rise in the second quarter, averaging at 4.6 percent. As in the previous quarter, the rise in inflation was primarily supply-side driven, linked to movements in the prices of specific food items, particularly meat products. Average headline inflation (1994-based) for the first semester was 4.1 percent, which is at the lower end of the Government target of 4.0-5.0 percent for the year. Official NSO data for core inflation likewise continued to show an uptrend in the second quarter, as did alternative measures calculated by the BSP.  
  • Demand conditions continued to improve from consumption expenditures, but credit demand and capital spending remain weak. Demand conditions continued to improve from consumption spending, particularly on food and clothing and short message services (SMS), on the strength of increased overseas workers’ remittances and improved farm income. Overall demand was also supported by election-related government spending and public sector construction as well as investment spending in the form of inventory buildup. However, bank lending activity remained tepid as growth in spending on durable equipment slowed down, while trends in other demand indicators remained mixed. Moderate capacity utilization in manufacturing and soft labor market conditions also pointed to the continued presence of slack in the economy.  
  • Fiscal performance remains on track. The fiscal performance of the National Government (NG) remained on track owing to improved tax revenues. The cumulative NG deficit level for January-May 2004 of P77.4 billion was lower than the first semester target of P79.6 billion. Revenues for the first five months grew by 12.5 percent from a year ago as all revenue collecting agencies reported improved collections. Disbursements for the same period meanwhile rose by 10.3 percent compared to a year ago.
  • Global economic recovery is proceeding robustly. Prevailing conditions in the world economy continued to point to a well-established and broader-based recovery, which augurs well for external demand. However, the expansion is also raising concerns about inflation pressures, with authorities in advanced economies signaling a shift to monetary tightening and rising foreign interest rates in the near term. The US Federal Reserve and the Bank of England, for example, have already raised their respective policy rates by 25 basis points in June.
  • Headline inflation is expected to track the upper end of the 4-5 percent target range for 2004, then briefly exceed the target in 2005, before decelerating to 4-5 percent in 2006. Headline inflation is forecasted to lie within the range of the 4-5 percent target for 2004, but with some possibility of temporary exceeding the 2005 target, as the full impact of the supply-side factors is felt. However, it should be emphasized that such cost-side factors have only a temporary impact on inflation. Thus, such inflationary impact should begin to taper down by 2005, and to be contained within that year, so that the inflation outlook should be back to normal by 2006.
  • Current conditions argue against tightening, for the following reasons: (1) the predominant influence on the inflation outlook of supply-side or cost-push factors, which are not only deemed transitory but also to be curbed by monetary action; (2) the absence of a clear threat to inflation over the medium-term, given indications that forecasted inflation will quickly revert towards the target in 2006; (3) the continued presence of excess capacity in the economy as reflected in the unemployment rate; and (4) the continued need to preserve the policy stimulus to the real sector given the absence of a clear, sustainable, and broad-based upsurge in demand conditions. In the event that the 2005 target is exceeded, as confirmed by the release of official NSO data in January 2006, the BSP will issue an open letter to the public outlining the reasons behind the deviation of actual inflation from the target, what monetary authorities did in response to the deviation, and why they chose to respond in such a fashion.  
  • The stance of monetary policy will continue to emphasize caution. In the months ahead, the monetary stance of the BSP will continue to emphasize caution and focus on the inflation objective while maximizing any flexibility to help sustain economic growth. Monetary authorities will continue to monitor the feed-through effects of higher transport fares and fuel costs, paying attention to the risk of an escalation to second-round effects on basic commodities that may require monetary action in the future. At the same time, the BSP will encourage the application of non-monetary measures by the government to address prevailing supply-side risks, such as those arising from domestic supply constraints on food items. In general, given that monetary policy restrains inflation mainly by curbing demand, policymakers have deemed it not necessary to respond with monetary tightening in the present case given that looming inflationary pressures growth are being driven not by excessive growth in aggregate demand but by cost-side developments. Such pressures are not expected to lead to a permanent shift in the price path over the medium term.

Read full text of the 2nd Quarter 2004 Inflation Report

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