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Inflation Continues to Ease in Q3 2015


The BSP announced today the publication of the 56th issue of the quarterly BSP Inflation Report covering the period July-September 2015. The full text is also being 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 Q3 2015 BSP Inflation Report:

  • Inflation eases further. Year-on-year headline inflation continued to decelerate in Q3 2015, slowing down to 0.6 percent from the quarter- and year-ago rates of 1.7 percent and 4.7 percent, respectively. This brought the year-to-date (ytd) average inflation to 1.6 percent, which is below the National Government’s (NG) target range of 3.0 percent ± 1.0 percentage point for 2015. The continued deceleration in headline inflation was driven mainly by the slower increases in most food items as a result of adequate domestic supply. Non-food inflation likewise decreased due to the decline in power rates and in the prices of domestic petroleum products. Similarly, measures of core inflation eased further during the quarter.
  • Domestic demand stays intact. Real gross domestic product (GDP) expanded by 5.6 percent in   Q2 2015, driven mainly by accelerated consumer and government spending as well as increased investments on the demand side and by the resilient service sector growth on the production side. Moreover, high-frequency indicators of demand reported positive signals. Vehicle sales remained brisk, while the composite Purchasing Managers’ Index (PMI) stayed above the 50-point expansion threshold. Business and consumer sentiment for the next quarter also turned upbeat, supported by bright prospects for the holidays as well as broadly favorable macroeconomic conditions.
  • Economic prospects across the globe continue to vary. Growth in the US accelerated, reflecting upturns in exports, personal and government consumption, as well as nonresidential fixed investment. Economic activity in the euro area also remained firm, with leading indicators pointing to new incoming businesses. By contrast, economic activity in Asian economies was more subdued, as Japan continued to register a modest recovery and as growth in China and India eased. Softer growth in emerging markets also dragged down global economic output and weighed down overall prospects for growth, to which a number of central banks across the globe responded by easing their monetary policy settings to support domestic economic activity amid lower oil and commodity prices.
  • Domestic financial market conditions remain sound. Ample liquidity and robust credit growth continued to support the favorable domestic growth outlook. However, external headwinds emanating from the slowdown in the Chinese economy and from uncertainty surrounding the US interest rate lift-off drove up risk aversion and the search for safe-haven assets. Consequently, the Philippine Stock Exchange index dipped, the peso depreciated, and spreads on the country’s sovereign debt instruments widened, reflecting investors’ concerns over potential spillover effects of slowing growth across emerging markets. Nonetheless, investor appetite for local government securities remained healthy. The Philippine banking system also continued to be sound and resilient, as indicated by various metrics for capitalization as well as asset growth and quality.  
  • The BSP maintains its monetary policy settings during the quarter. The Monetary Board (MB) decided to maintain the BSP’s key policy interest rates at 4.0 percent for the overnight borrowing or reverse repurchase (RRP) facility, 6.0 percent for the overnight lending or repurchase (RP) facility, and the accompanying rates for term RRPs, RPs, and the Special Deposit Account (SDA) facility. The reserve requirement ratios were left unchanged as well. These decisions were based on the assessment that the benign inflation outlook and the economy’s underlying growth momentum provide ample room to keep monetary policy settings unchanged.
  • Current monetary policy settings are appropriate. Latest baseline inflation forecasts show that inflation is likely to settle slightly below the target range of 3.0 percent ± 1.0 percentage point for 2015 before rising gradually toward the midpoint of the target range in 2016-2017. Risks to the inflation outlook continue to be broadly balanced. Pending petitions for power rate adjustments and the impact of stronger-than-expected El Niño weather conditions on food prices and utility rates are seen to pose upside risks to the outlook, while downside risk could stem from slower-than-expected global economic activity.

While inflation expectations have breached the lower end of the 2015 target band, they remain within the inflation target range over the policy horizon. Nevertheless, domestic economic activity continues to expand at a solid pace, as credit and liquidity growth remains in step with the overall requirements of the economy. Volatility in the global financial market resulting from slower growth in China and the expected normalization of monetary policy in the US could be an important consideration for the inflation outlook in the quarters ahead to the extent that it influences inflation expectations and market sentiment on the domestic front. Going forward, the BSP will continue to monitor domestic and external developments to ensure that the monetary policy stance remains consistent with its price and financial stability objectives.

Meanwhile, the BSP announced on 30 September 2015 its plan to implement an interest rate corridor (IRC) system by Q2 2016. The IRC system will introduce key changes in the framework for monetary operations which will enhance the effectiveness of monetary policy. The shift to IRC will not represent a change in the BSP’s monetary policy stance and is not expected to have a significant impact on the general level of interest rates. Nevertheless, the IRC system will help improve the transmission of policy rate adjustments through the conduct of active liquidity management operations to effectively implement the monetary policy stance. Moreover, the IRC is expected to support the development of capital markets by providing an enabling environment for increased money market transactions and active liquidity management by banks.

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