The BSP announced today the publication of the 61st issue of the quarterly BSP Inflation Report covering the period October-December 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 Q4 2016 BSP Inflation Report:
- Average inflation settles below the 2016 inflation target range. Year-on-year headline inflation rose in Q4 2016 to 2.5 percent from the quarter-ago average of 2.0 percent. This brought the full-year average inflation rate to 1.8 percent, higher than the 1.4-percent average in 2015 but still below the National Government’s (NG) target range of 3.0 percent ± 1.0 percentage point for the year. The supply of food commodities, including rice, remained generally adequate in 2016, although the adverse impact of weather disturbances on the supply of key food items, as well as seasonal demand, contributed to the uptick in food inflation later in the year. International crude prices also rebounded in Q4 2016 following plans of production cutbacks among major oil-producing countries, although the increase in prices was not enough to offset the substantial decline seen in 2015. Together, these factors contributed to faster but slightly below-target inflation in 2016. Meanwhile, core inflation edged higher to 2.5 percent in Q4 2016 from 2.0 percent in the previous quarter, while the BSP’s alternative measures of core inflation showed mixed trends.
- Domestic demand remains robust. Real gross domestic product (GDP) grew by 7.1 percent in Q3 2016, slightly faster than the quarter-ago expansion of 7.0 percent. In the first three quarters of 2016, real GDP expanded by 7.0 percent, which is at the high end of the National Government’s (NG’s) full-year growth target of 6.0-7.0 percent. The expansion in real GDP was driven by household and government spending as well as investments in fixed capital, which offset the negative contribution of net exports. Moreover, high-frequency indicators of demand continued to point to firm growth prospects 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 also generally upbeat over the next quarter, supporting the view that demand conditions would remain firm moving forward amid steady credit growth and significant improvements in employment conditions.
- Global economic activity holds firm. Growth in the US economy accelerated in Q3 2016, reflecting an upturn in private inventory investment, exports, and federal government spending. Economic activity in the euro area likewise held steady on the back of strong household consumption, while favorable business sentiment, increasing business fixed investments, and stable private consumption spending supported the recovery of the Japanese economy. Output in India also increased with most sectors reporting expansions. Meanwhile, indicators point to a subdued recovery in China as investment in fixed assets stabilized. By contrast, the outlook for ASEAN countries weakened following reports of slower manufacturing activity across the region.
- Domestic financial market withstands uncertainty. Expectations of a US Fed rate hike in December, the uncertainty surrounding the elections in the US and in other European countries, as well as continued geopolitical tensions factored into global investors’ negative sentiment, which spilled into the domestic financial markets. The Philippine stock market index declined, spreads on the country’s debt widened, and the peso depreciated during the quarter, reflecting the shift in investor preferences amid firmer growth prospects in the US and other advanced economies. Nevertheless, investor appetite for local government securities remained healthy. The Philippine banking system also remained sound, marked by a continued increase in assets, lending, and deposits. In addition, based on the latest survey round, bank lending standards for loans to both enterprises and households were broadly unchanged during the quarter, indicating a generally stable supply of credit.
- The BSP maintains its monetary policy settings. The BSP decided to maintain its key policy interest rate for the overnight reverse repurchase or RRP facility at its monetary policy meetings in November and December. The interest rates for other monetary policy instruments were also kept steady. Similarly, the reserve requirement ratios were left unchanged.
Current monetary policy settings remain appropriate. The BSP’s decision to maintain its policy stance was based on its assessment that the inflation environment remained manageable. Latest baseline forecasts show that inflation is likely to return to a path consistent with the inflation target range in 2017-2018. While inflation is expected to continue to gather momentum in the year ahead, inflationary pressures are seen to remain manageable over the policy horizon given well-contained inflation expectations. The balance of risks surrounding the inflation outlook remains tilted to the upside, owing in part to pending petitions for adjustments in electricity rates and to the initial impact of the NG’s broad fiscal reform program. Lingering uncertainty in global economic prospects, however, continues to pose a key downside risk to the inflation outlook.
Looking ahead, the Philippine economy is expected to be able to absorb external shocks and sustain its growth trajectory, as firm domestic demand conditions, adequate domestic liquidity and credit, and ongoing reforms, including on the fiscal front, continue to provide solid footing for steady expansion. Moreover, in the near term, policy settings and the resulting overall monetary conditions remain appropriately supportive of economic activity. At the same time, it provides scope for flexibility in view of continued uncertainty in the global economy as well as the possibility that the US Fed may raise interest rates at a faster pace in 2017. Accordingly, the BSP will continue to monitor domestic and external developments to ensure price and financial stability conducive to sustained economic growth.
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