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Inflation Remains Subdued in Q1 2016


The BSP announced today the publication of the 58th issue of the quarterly BSP Inflation Report covering the period January-March 2016. 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 Q1 2016 BSP Inflation Report:

  • Headline inflation rises but remains subdued. Year-on-year headline inflation in Q1 2016 remained below the government’s target range of 3.0 percent ± 1.0 percentage point (ppt) at      1.1 percent, slightly higher than the quarter-ago average of 1.0 percent. Modest upticks in the prices of selected food items contributed to the marginal increase in the inflation reading. Meanwhile, non-food inflation remained steady as declines in utility rates were counterbalanced by increases in other items such as transport fares. By contrast, core inflation eased to 1.6 percent from 1.8 percent in the previous quarter. Two out of the three alternative measures of core inflation measured by the BSP were likewise lower.
  • Domestic demand stays firm. Real gross domestic product (GDP) expanded by 6.3 percent in      Q4 2015, driven mainly by accelerated consumer 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 improve, supporting the view that demand conditions would remain firm moving forward amid sustained credit growth, ample liquidity, and notable improvements in employment conditions.
  • Global economic activity continues to be muted at the start of 2016. Economic activity in the US, euro area, and Japan regained some momentum during the review quarter. By contrast, downturns were observed in major emerging economies such as China, India, and Brazil, which dampened overall global growth prospects. Several central banks responded to the weak outlook by easing their respective monetary policy settings in order to stave off potential deflationary pressures.
  • Domestic financial market conditions remain sound despite external headwinds. Uncertainty stemming from continuing concerns over global economic growth prospects, the slowdown in China’s economy as it shifts to a more sustainable growth framework, and deepening monetary policy divergence across the globe dampened investor sentiment and buffeted emerging market assets. In the Philippines, cautious trading reined in gains in the equities market, while bond spreads and risk premiums rose on increased risk perception. Nonetheless, the country’s sovereign debt spreads remained lower compared to Asian neighbors, and appetite for local government securities remained healthy. The Philippine banking system also continued to be sound, as indicated by various measures of liquidity and capital adequacy. Bank lending standards were also largely unchanged based on the latest results of the BSP’s senior bank loan officers’ survey.
  • The BSP maintains its monetary policy settings in Q1 2016. 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. The BSP’s assessment of a manageable inflation outlook and robust growth conditions continued to support keeping monetary policy settings steady, particularly as inflation expectations remained firmly anchored within the inflation target band over the policy horizon.
  • Current monetary policy settings are appropriate, as inflation is projected to settle within the target range in 2016-2017. Measures of domestic economic activity continue to be positive despite indications that global economic growth has been slower than anticipated. At the same time, although inflation pressures remain largely subdued, the sustained buoyancy of domestic demand continues to allay concerns on potential deflationary pressures. In addition, liquidity and credit continue to grow at a reasonable pace, suggesting that the economy may not be in need of further monetary stimulus at the moment. Going forward, the BSP has scope to further assess whether weaker external conditions and heightened financial market volatility would require an appropriate policy response. Accordingly, 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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