The BSP announced today the publication of the 57th issue of the quarterly BSP Inflation Report covering the period October-December 2015. The full text is also being released in electronic format (as a downloadable PDF file) on the BSP website (http://www.bsp.gov.ph/publications/regular_inflation.asp). The BSP Inflation Report is being 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 overall thinking and analysis behind the Monetary Board’s decisions on monetary policy.
The following are the highlights of the Q4 2015 BSP Inflation Report:
- Average inflation settles below the 2015 inflation target range. Year-on-year headline inflation rose in Q4 2015 to 1.0 percent from the quarter-ago average of 0.6 percent. This brought the full-year average inflation rate to 1.4 percent, which is below the National Government’s (NG) target range of 3.0 percent ± 1.0 percentage point for 2015. Easing petroleum prices and ample food supply contributed largely to the low inflation readings during the year. Nevertheless, inflation gained momentum in Q4 2015 due to the seasonal demand for particular food items, the adverse impact of typhoons on food supply, as well as the recent increases in passenger fares for air and sea transport. Meanwhile, two out of the three alternative measures of core inflation measured by the BSP remained steady.
- Domestic demand stays intact. Real gross domestic product (GDP) expanded by 6.0 percent in Q3 2015, driven mainly by accelerated consumer and government spending as well as increased investments in durable equipment and public construction. Moreover, high-frequency indicators of demand continued to suggest a positive outlook on domestic spending. Vehicle sales remained brisk, while the composite Purchasing Managers’ Index (PMI) stayed above the 50-point expansion threshold. Business and consumer sentiment also continued to be optimistic, supporting the view that demand conditions would remain firm moving forward amid ample liquidity and notable improvements in employment conditions.
- Global economic prospects soften on the continuing slowdown in emerging markets. Economic activity in advanced economies stayed firm, underscored by a solid recovery in the US, Japan, and the euro area. By contrast, a slowdown was noted in major emerging markets such as China, Brazil, and Russia. The subdued economic outlook for emerging markets dampened global growth prospects, to which a number of central banks responded by easing their monetary policy settings to support domestic economic activity and stave off deflationary pressures.
- Domestic financial market conditions remain sound despite external uncertainty. External headwinds emanating from a weak global economic outlook and uncertainty surrounding the adjustment in interest rates in the US contributed to episodes of risk-off sentiment. Consequently, the Philippine equities market saw dampened trading activity, with gains tempered by episodes of volatility. Bond spreads and risk premiums likewise reflected the gyrations in global financial markets. Nonetheless, the country’s sovereign debt spreads remained lower than those of its Asian neighbors. Investor appetite for government securities (GS) also remained healthy, affirmed by the oversubscription in the scheduled GS auctions. Moreover, the banking system remained sound, as indicated by various measures of liquidity and capital adequacy.
- The BSP maintains its monetary policy settings in 2015. 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 BSP’s assessment of prevailing inflation dynamics and the potential impact of recent monetary policy adjustments overseas on global financial conditions. The MB was of the view that amid a benign inflation outlook, the economy’s underlying growth fundamentals remained intact and provided ample room to keep monetary policy settings unchanged.
- Current monetary policy settings are appropriate, as inflation is projected to return gradually to a target-consistent path in 2016-2017. While inflation is expected to continue to gather momentum in 2016, inflationary pressures are seen to remain manageable over the policy horizon given well-contained inflation expectations. Latest baseline inflation forecasts show that inflation is likely to rise moderately and settle within the inflation target band of 3.0 percent ± 1.0 percentage point in 2016-2017. Pending petitions for power rate adjustments and the impact of protracted El Niño weather conditions on food prices and utility rates are seen to pose upside risks to the inflation outlook. On the other hand, the continued weakness in the global economy serves as the key downside risk to inflation.
Meanwhile, 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. On the external front, the adjustments in monetary policy settings in the US and other countries, the evolving outlook for growth and financial market conditions in China, as well as the possibility of slower global economic activity are important considerations for monetary policy to the extent that they influence inflation expectations and market sentiment. Going forward, the BSP will continue to monitor these domestic and external developments to ensure that the monetary policy stance remains consistent with its price and financial stability objectives.
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