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Inflation Environment Remains Manageable in Q1 2013


The BSP announced today the publication of the 46th issue of the quarterly BSP Inflation Report covering the period January – March 2013. 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 Q1 2013 BSP Inflation Report:

  • Higher food prices drive headline inflation. Average inflation increased to 3.2 percent in Q1 2013 from the quarter-ago and year-ago rates of 2.9 percent and 3.1 percent, respectively. This was due mainly to higher prices of food items—notably rice, meat, and vegetables—owing to tight domestic supply conditions, as well as higher prices of alcoholic beverages and tobacco products due to the increase in excise taxes on alcohol and tobacco products. Meanwhile, non-food inflation eased due to lower electricity rates and prices of domestic petroleum products. The official measure of core inflation likewise rose to 3.8 percent in Q1 2013 from the quarter-ago and year-ago rates of 3.4 percent and 3.5 percent, respectively. However, two out of the three alternative measures of core inflation estimated by the BSP were lower in Q1 2013 relative to the rates registered in the previous quarter. The number of CPI components showing inflation rates above the 5.0 percent threshold also increased but accounted for a smaller proportion of the CPI basket.
  • Domestic economic activity remains firm. The Philippine economy grew by 6.6 percent in 2012, higher than the government’s growth target of 5-6 percent. In Q4 2012, the continuing strength in consumer demand, accelerated government spending, and modest recovery in exports of manufactured goods buoyed growth on the demand side, while solid gains were recorded in all three major production sectors. Recent indicators of activity likewise point to a steady growth momentum, supported by bullish consumer and business sentiment. Vehicle and energy sales have been strong at the start of the quarter, while election-related expenditure and the government’s planned accelerated spending program over the coming months are seen to provide a further boost to domestic demand. At the same time, survey indicators continue to signal a steady expansion of economic activity, particularly in manufacturing and services.
  • Global economic prospects have broadly improved, but downside risks remain. The IMF expects global economic growth to strengthen in 2013, albeit more gradually than earlier projected as the recovery proceeds at an uneven pace across the globe. Economic recovery in the US continues to gain traction, but the budget sequester will represent a major downside risk to growth. Prospects for Japan have also improved, aided by the Bank of Japan’s aggressive monetary easing stance. The pace of growth in emerging economies also remains fairly robust on the back of stable domestic demand. However, the broad outlook for Europe remains on the downside amid renewed uncertainty surrounding the debt crisis in the euro area. Meanwhile, inflation dynamics are likely to remain manageable, as favorable food and fuel supply conditions are seen to limit upward pressures on commodity prices.
  • Confidence over the country’s favorable economic prospects boosts domestic financial conditions.  Indications of robust economic performance and expectations of further credit rating upgrades helped bolster investor interest and market confidence in the Philippines. At the same time, stronger policy actions in advanced economies and indications of strengthening economic activity in the US and China supported a broad rally in global financial markets. Despite renewed concerns over the debt crisis in the euro area, the local stock market remained bullish, the peso maintained its relative strength, and spreads on Philippine debt were stable. Auctions for government securities had also been generally oversubscribed, while yields across all tenors fell, reflecting ample liquidity in the financial system and investors’ search for higher-yielding assets following the BSP’s move to reduce the interest rate on its Special Deposit Account (SDA) facility. Domestic liquidity likewise continued to expand, supported by brisk credit activity.
  • The Monetary Board (MB) maintains policy rates but reduces SDA rates by 100 basis points (bps). During its monetary policy meetings on 24 January and 14 March, the MB decided to keep its policy interest rates steady on its assessment of a manageable inflation outlook amid evenly balanced inflation risks over the policy horizon. The interest rate on the reverse repurchase (RRP) facility was also set at 3.50 percent for all tenors during the 14 March meeting. At the same time, the benign inflation outlook provided scope for the BSP to reduce the interest rate on the SDA facility by 50 bps each during its policy meetings in Q1 2013, consistent with the BSP’s efforts to fine-tune the operations of its monetary policy instruments and enhance their effectiveness in promoting price and financial stability.
  • Prevailing inflation and output dynamics support the maintenance of current monetary policy settings. Baseline forecasts indicate that inflation is likely to remain in line with the 4±1 percent inflation target over the policy horizon, supported by well-anchored inflation expectations. The risks to the inflation outlook are also considered to be evenly balanced. Uncertainty over the strength of the global economy is expected to moderate pressures on international commodity prices, while the appreciation of the peso could temper imported inflation. However, upside risks to the inflation outlook remain, particularly those arising from additional petitions for adjustments in domestic utility rates and the impact of sustained capital inflows on domestic liquidity growth and asset prices. On balance, the overall growth momentum, supported by strong private demand and higher fiscal spending, remains firm. Brisk credit activity, ample liquidity, and favorable global economic conditions also support the case for keeping policy settings unchanged.

Moreover, the benign inflation outlook and improving growth prospects also provide scope for the BSP to rationalize further its SDA facility to enhance the resiliency of the central bank’s monetary policy operations amid the continued surge in foreign exchange inflows. The recent efforts to fine-tune the array of monetary policy tools are aimed at ensuring their effectiveness in promoting the BSP’s price and financial stability objectives. 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. The BSP also stands ready to employ macroprudential measures as necessary to address pre-emptively any potential misalignment in asset prices.

[On 25 April 2013, the MB decided to maintain the BSP’s key policy rates at 3.50 percent for the overnight borrowing or RRP facility and 5.50 percent for the overnight lending or repurchase (RP) facility. Reserve requirement ratios were kept steady as well. Meanwhile, the interest rates on the SDA facility were reduced by 50 bps to 2.00 percent across all tenors.]

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