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Inflation Rises, Stays Below Target in Q3 2016

10.21.2016

The BSP announced today the publication of the 60th issue of the quarterly BSP Inflation Report covering the period July-September 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 Q3 2016 BSP Inflation Report:

Headline inflation accelerates but stays benign. Year-on-year headline inflation in Q3 2016 increased to 2.0 percent from the quarter-ago average of 1.5 percent. Average inflation for the first three quarters of the year was 1.6 percent, still below the National Government’s range target of 3.0 percent ± 1.0 percentage point for 2016-2018. The higher headline inflation print for the third quarter was due mainly to higher prices of certain food and non-food items. The lean supply season in rice production as well as weather-related supply disruptions of key food items pushed up food prices. Non-food inflation likewise increased due to higher prices for clothing and footwear, housing rentals, as well as for services pertaining to health, restaurants, and catering. Meanwhile, core inflation edged up to 2.0 percent from 1.7 percent in the previous quarter, and alternative measures of core inflation measured by the BSP were similarly higher.

• Domestic demand sustains robust growth. Real gross domestic product (GDP) grew by 7.0 percent in Q2 2016, faster than the quarter-ago expansion of 6.8 percent. Real GDP growth in the first half of 2016 was 7.0 percent, well in line with the National Government’s growth target of 6.5 – 7.5 percent for the year. The expansion in real GDP was driven by increased investment, particularly in durable equipment and construction, as well as by higher consumer and government spending. Moreover, high-frequency indicators of demand continued to suggest a positive outlook for domestic private spending in the near term. Vehicle sales remained brisk, while the composite Purchasing Managers’ Index (PMI) stayed above the 50-point expansion threshold. Business and consumer sentiment was more upbeat in anticipation of the Christmas holidays, supporting the view that demand conditions would remain firm moving forward amid steady credit growth and notable improvements in employment conditions.

• Global economic activity remains tepid. Growth in the US economy has held firm as consumption and investment have accelerated, while economic activity in the euro area and Japan has continued to be sluggish. By contrast, indicators point to a marginal recovery in China, although investments in fixed assets have slowed down. The more subdued outlook for advanced economies, particularly after the Brexit referendum, has led a number of central banks to ease their monetary policy settings to support domestic growth amid a benign inflation environment.

• Domestic financial market withstands uncertainty. The strong GDP growth in Q2 as well as the peaceful transition to the new administration boosted the domestic financial market. However, the subdued global growth outlook dampened market sentiment and factored into the depreciation of the peso during the quarter. Nevertheless, the Philippine equities market resumed its rally due in part to the US Fed’s decision to hold interest rates steady during the quarter, while investor appetite for local currency government securities remained healthy and oversubscribed. Meanwhile, the country’s debt spreads and risk premiums showed mixed trends, reflecting regional developments. Moreover, the Philippine banking system remained sound, marked by a continued increase in assets, lending, and deposits. Bank lending standards for loans to both enterprises and households were also broadly unchanged during the quarter, indicating a generally stable supply of credit.

• The BSP maintains its monetary policy settings in Q3 2016. The BSP decided to maintain its key policy interest rate for the overnight reverse repurchase or RRP facility at its monetary policy meetings in August and September. The interest rates for other monetary policy instruments were also kept steady. Similarly, the reserve requirement ratios were left unchanged. The BSP’s decision to maintain its policy stance was based on its assessment that the inflation environment remained manageable.

• Current monetary policy settings remain appropriate. Latest baseline forecasts show that while inflation could settle below the low end of the National Government’s inflation target range in 2016, inflation is projected to approach the midpoint of the target range in 2017 and 2018. Supply-side factors continue to underpin domestic price movements. Nevertheless, inflation expectations remain firmly anchored within the inflation target range for 2017-2018. At the same time, while global economic conditions have remained subdued, trends in domestic economic activity show sustained firmness, supported by solid private household consumption and investment, buoyant business and consumer sentiment, and adequate credit and domestic liquidity.

Pending petitions for adjustments in electricity rates, along with proposed adjustments in the excise tax rates of petroleum products and their corresponding second-round effects on transport fares, were the main upside risks to the inflation outlook. Meanwhile, slower global economic activity stood as the key downside risk.

In sum, prevailing conditions for inflation and output continue to support keeping monetary policy settings steady. Keeping a steady hand on policy levers also remains prudent given the challenging global economic environment and uncertainty over growth prospects and monetary policy action in major advanced economies. Going forward, the BSP will continue to monitor emerging price and output conditions to ensure price and financial stability conducive to sustained economic growth.

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