Average annual inflation for 2002 settled at 3.1 percent, the lowest since 1988. The 2002 inflation rate is also much lower than the previous year’s average of 6.1 percent and well below the government’s full-year target of 4.5-5.5 percent. Inflation in December 2002 remained subdued at 2.6 percent, compared to 2.5 percent in November 2002 and 4.1 percent in December 2001.
The deceleration in inflation during the year resulted mainly from the slowdown in food inflation, and subdued demand-pull inflationary pressures as well as partly from prudent monetary policy. The subdued inflation outturn strengthens monetary authorities’ expectations of a manageable inflation environment over the near term. In particular, average inflation in 2003 is expected to trend upward slightly, broadly tracking the government’s target of 4.5-5.5 percent for the year.
The combination of a manageable inflation outlook, growing but still relatively modest domestic demand, and the prospect of weak global economic conditions highlight the need for policymakers to ensure that monetary policy settings are supportive of the liquidity requirements of a growing economy. The BSP believes that the current monetary policy stance remains appropriately supportive of non-inflationary economic growth. Nevertheless, the presence of cost-side inflationary risks, such as possible food price increases associated with the El Niño weather phenomenon, the pending increases in user charges (such as electricity, transport and water rates) and the impact of geopolitical factors on international oil prices as well as the challenges in the fiscal front, require a cautious monetary policy stance going forward, with careful attention to the risks to price stability and sustained economic growth.