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Inflation Remains Within Target in 2012


The BSP announced today the publication of the 45th issue of the quarterly BSP Inflation Report covering the period October – December 2012. The full text 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 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 Q4 2012 BSP Inflation Report:

  • Inflation remains within target range in 2012. Inflation for the whole year of 2012 averaged      3.2 percent, well within the government’s announced target range of 3-5 percent for the year. In Q4 2012, inflation decelerated to 2.9 percent from the quarter-ago rate of 3.5 percent due largely to lower inflation for food items, notably vegetables, oils, fish, and fruits, on account of ample domestic supply. Non-food inflation also decreased due to slower price increases for electricity, gas, and other fuels. Similarly, the official measure of core inflation eased to 3.4 percent from     4.1 percent in the previous quarter. All alternative measures of core inflation estimated by the BSP likewise declined relative to the rates registered in the previous quarter, suggesting a relative absence of broad-based inflationary pressures.
  • The domestic economy continues to gain pace. The Philippine economy grew by 7.1 percent in Q3 2012, bringing the year-to-date growth of GDP to 6.5 percent. The expansion was driven by strong consumer demand, accelerated government spending, and sustained recovery in exports on the demand side. Meanwhile, all three major production sectors posted solid gains during the quarter, with services contributing more than half to Q3 growth.  Latest data suggest that the momentum could hold up in the near term, supported by upbeat business and consumer sentiment, the low interest rate environment, and the government’s accelerated spending program. The latest purchasing managers’ index (PMI) also continues to signal a steady expansion of economic activity, particularly in services. Vehicle and energy sales have also posted strong growth during the review quarter.
  • Global economic activity shows signs of stabilization, but overall prospects remain subdued. Recent developments on the external front indicate that global economic conditions, on balance, continue to stabilize. Activity has picked up broadly in the US, supported by higher government spending and residential fixed investment, while the pace of growth in emerging economies has been robust on account of firm domestic demand. Nonetheless, global prospects remain soft amid lingering financial instability across Europe and the ongoing fiscal adjustment in the US. Meanwhile, global inflation continues to be benign due in part to subdued economic activity, with the inflation environment in advanced economies (AEs) expected to remain manageable given their sizeable spare capacity. Nonetheless, accommodative monetary policies in AEs and strong demand in emerging markets (EMs) could lead to higher global commodity prices, particularly for food items.
  • Global financial conditions improve on accommodative policy responses. The continued low interest-rate environment in AEs, coupled with improving macroeconomic indicators in the US and China and a modest recovery in euro area market sentiment, translated into increased demand for higher-yielding EM assets. This helped fuel rallies in equities markets and the further narrowing of debt spreads across Asia. Market concerns over the US “fiscal cliff” partly dampened market confidence towards the end of the quarter. Nonetheless, the Philippine stock market index rallied strongly in Q4 2012 on the country’s strong macroeconomic fundamentals and on expectations of a further credit rating upgrade. Philippine debt spreads also narrowed further due to increased demand for EM assets. The peso likewise continued to appreciate, buoyed by steady foreign exchange inflows from overseas Filipino remittances, business-process outsourcing activities, and portfolio investments. At the same time, domestic liquidity continued to grow, supported by brisk credit activity.
  • The Monetary Board (MB) reduces policy rates during the quarter. During its monetary policy meeting on 25 October 2012, the MB decided to cut its key policy rates by 25 basis points (bps) to   3.50 percent for the overnight borrowing or reverse repurchase (RRP) facility and 5.50 percent for the overnight lending or repurchase (RP) facility. This followed the three 25-bp cuts in the first three quarters of the year, bringing the cumulative policy rate reduction to 100 bps. The benign inflation outlook, together with well-anchored inflation expectations, provided room for a reduction in policy rates, which would help buffer domestic demand against global economic headwinds. Thereafter, the MB decided to maintain monetary policy settings to allow previous policy rate adjustments to work their way through the economy.
  • The manageable inflation outlook provides room for monetary policy to support domestic economic activity amid uncertain global prospects. Baseline forecasts indicate a benign inflation path, with the risks to the inflation outlook considered to be broadly balanced. Downside risks to the inflation outlook center on the uncertainty over the strength of the global economy and its impact on commodity prices. A continued appreciation of the peso could also temper imported inflation. Meanwhile, upside risks to inflation include pending petitions for utility rate adjustments and liquidity arising from strong foreign exchange inflows on the back of the country’s favorable growth prospects. On balance, the overall growth momentum, supported by strong private demand, higher fiscal spending, and ongoing monetary stimulus, remains firm. Brisk credit activity, ample liquidity, and more favorable global economic conditions also continue to give scope to keep policy settings unchanged. As uncertainty in the external environment cannot be discounted entirely, the cumulative reduction in policy rates in 2012 is seen to continue to support aggregate demand and maintain price stability. Going forward, the BSP will continue to monitor emerging price and output developments to ensure that monetary conditions remain in line with price stability while supportive of economic growth.

[On 24 January 2013, the MB decided to maintain the BSP’s key policy rates. The interest rates on term RRPs and RPs were also maintained accordingly. Meanwhile, the MB decided to set the interest rates on the special deposit account (SDA) facility at 3.00 percent for all tenors, effective immediately, consistent with the BSP’s continuing efforts to fine-tune the operation of its monetary policy tools.]

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