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BSP Releases Inflation Report for the First Quarter of 2004


Bangko Sentral ng Pilipinas Officer-In-Charge Alberto V. Reyes announced today the publication of the tenth issue of the quarterly BSP Inflation Report covering the period January-March 2004. The full text of the Inflation Report has been released today in electronic format (as a PDF file) and may be downloaded from the BSP website (http://www.bsp.gov.ph).  A print version will be made available on 31 May 2004.  The BSP Inflation Report is being published as part of the BSP’s transparency mechanism under inflation targeting and to convey to the public the overall thinking and analysis behind the BSP’s decisions on monetary policy. 

The following are the highlights of the BSP Inflation Report for the First Quarter 2004:

  • Headline inflation was moderately higher than in the preceding quarter, driven largely by movements in prices for food items such as corn, fish, and meat.  This was based on the existing 1994-based CPI data as well as the new 2000-based CPI series published by the National Statistics Office (NSO), which is derived from an updated basket of goods and services.  The NSO also began releasing an official rate of core inflation, defined as the rate of change of headline CPI after excluding selected food and energy items. Core inflation rates derived from the 1994- and 2000-based CPI were generally higher compared to the previous quarter and a year earlier.
  • The overall pace of economic activity continued to be driven by strong private consumer spending. Nevertheless, there continues to be soft spots in demand, along with evidence of slack in resource use based on fairly high unemployment rate and spare capacity in manufacturing. 
  • Growth in money and credit demand remained moderate in the first quarter.  The average year-on-year growth in domestic liquidity or M3 for January-February improved to 4.3 percent from 3.6 percent in the preceding quarter.  However, this was driven mainly by foreign exchange inflows from Overseas Filipino Workers’ (OFW’s) remittances in early January and increased dollar purchases by banks ahead of their future requirements.  Commercial bank loans contracted by 1.5 percent year-on-year in February 2004 following a minimal 0.8 percent increase in January.
  • The fiscal position of the National Government (NG) was on track vis-à-vis the fiscal program as the cumulative NG deficit for January-February 2004 of P34.6 billion was 58.7 percent of the 2004 first quarter target of P58.9 billion.  Preliminary estimates of NG deficit in the first quarter of 2004 reached P56.8 billion.
  • Global economic recovery continues to strengthen and broaden, particularly, in the US and Japan. Downside risks to global economic activity have largely dissipated, but continuing economic and structural imbalances in the major economies may limit the pace and strength of the recovery process. This outlook suggests a moderate improvement in external demand for the Philippines. 
  • Overall, the balance of demand and supply conditions indicates a moderate increase in average inflation to levels consistent with the Government’s inflation target of 4.0 – 5.0 percent for 2004-2005.  Domestic demand has exhibited signs of improvement.  Similarly, external demand has strengthened with the rebound in exports. Nevertheless, the continued presence of unused capacity and double-digit unemployment rate are expected to temper significant demand-induced pressures on consumer prices.   
  • Cost-side factors continue to represent the principal source of risk to the inflation outlook. Such cost-side factors include volatile movements in crude oil prices, the resulting transport fare adjustments, possible increases in utility charges, mounting calls for wage adjustments as well as the possibility of sustained currency depreciation.
  • The stance of monetary policy has been largely cautious over the past year and is likely to remain so in the near term.  This posture stems in part from monetary authorities’ belief that demand-driven pressures on consumer prices are likely to remain subdued over the near term, and the principal source of risk to the inflation outlook primarily stems from cost-side factors, which are outside the control of monetary policy.  However, the policy preference for caution is rooted in the belief that inflation risks from sentiment-driven volatile movements in the nominal exchange rate remain present, giving rise to concerns regarding the adverse implications for inflation and inflation expectations.  The policy stance will thus continue to ensure that the general macroeconomic environment remains conducive to credit demand and investment activity, and that financing conditions do not become unduly restrictive to loan activity. 

Full text of BSP Inflation Report for the First Quarter of 2004

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