The BSP announced today the publication of the 62nd issue of the quarterly BSP Inflation Report covering the period January-March 2017. 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 2017 BSP Inflation Report:
Headline inflation rises. Average headline inflation rose to 3.2 percent in Q1 2017 from the quarter-ago average of 2.5 percent. Nevertheless, inflation remained within the National Government’s (NG’s) target range of 3.0 percent ± 1.0 percentage point (ppt) for the year. The rise in average headline inflation during the quarter could be attributed to some tightness in domestic food supply and upward adjustments in petroleum prices and electricity rates. Similarly, core inflation increased to 2.7 percent in Q1 2017 from 2.5 percent in the previous quarter. Two out of the three alternative core inflation measures of the BSP were likewise higher.
The domestic economy remains strong. Real gross domestic product (GDP) rose by 6.6 percent in Q4 2016, bringing full-year growth to 6.8 percent. Growth was driven mainly by the acceleration of growth in government spending and exports of goods on the expenditure side. On the production side, the faster expansion in services was tempered by the contraction in agriculture as well as by the slower growth in industry. Meanwhile, high-frequency indicators of demand continued to suggest a positive outlook for domestic spending in the near term. Vehicle sales sustained its double-digit growth, while the composite Purchasing Managers’ Index (PMI) stayed above the 50-point expansion threshold.
Global economic activity continues to pick up its pace. Growth in the US, Japan, and China gained some momentum, while slower expansion was noted in the euro area, India, and ASEAN region. On balance, according to the IMF, prospects for global economic growth have remained generally positive, supported by favorable latest readings of economic activity indicators. Meanwhile, inflation across the globe is seen to rise but remain broadly manageable in the near term.
Domestic financial markets withstand external headwinds. Volatility stemming from concerns over the potential shifts in macroeconomic policies in the US, including the continuing normalization of US monetary policy, as well as the potential implications for the global economy of the Brexit process and the decline in China’s foreign exchange reserves, spilled over to the country’s financial markets. The peso remained weak as stronger growth in the US boosted demand for the US dollar. Nonetheless, the stock market index rose during the quarter, spreads on the country’s sovereign debt narrowed, and appetite for local government securities remained healthy as robust indicators of domestic economic activity supported favorable investor sentiment. The Philippine banking system also continued to be sound, as indicated by various measures of capital adequacy and credit activity. Bank lending standards were also largely unchanged based on the latest results of the BSP’s senior bank loan officers’ survey, indicating a generally stable supply of credit.
The BSP leaves its monetary policy settings unchanged in Q1 2017. The BSP decided to maintain its key policy interest rate during its monetary policy meetings in February and March. The interest rates for other monetary policy instruments were accordingly 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 despite the recent upticks in inflation owing to higher food and oil prices.
Current monetary policy settings remain appropriate. The latest baseline forecasts of the BSP show that inflation is likely to rise near the high end of the government’s target range in 2017, driven in part by a weaker peso and the sustained strength in domestic economic activity. Nonetheless, inflation is expected to ease and subsequently approach the midpoint of the target range in 2018. Meanwhile, although inflation expectations have risen in recent months, they remain firmly anchored within the inflation target band.
The balance of risks surrounding the inflation outlook also remains tilted to the upside, owing in part to possible adjustments in electricity rates and transportation fares as well as to the expected 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, 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 calibrated in support of economic activity. Accordingly, the BSP will continue to monitor domestic and external developments to ensure that the monetary policy stance remains consistent with its price and financial stability objectives.
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