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BSP Inflation Report for the Fourth Quarter of 2002


Bangko Sentral ng Pilipinas Governor Rafael B. Buenaventura announced today the publication of the fifth issue of the quarterly BSP Inflation Report covering the period October-December 2002. 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.  A print version will be made available on 31 January 2003. The BSP Inflation Report is being published as part of the BSP’s transparency mechanisms under inflation targeting and to convey to the public the overall thinking and analysis behind the BSP’s decisions on monetary policy. The quarterly Inflation Report was first published in January 2002 and has been favorably received by various institutions, including the International Monetary Fund (IMF). The IMF, in particular, has noted that the report “provides a comprehensive description of recent developments, an incisive analysis of monetary policy, and a forthright assessment of inflation prospects. Moreover, it is clearly written, so that it can be readily understood by the informed public.”

The following are the highlights of the BSP Inflation Report for the Fourth Quarter 2002:

  • The inflation environment remained benign in the fourth quarter of 2002.  Headline inflation continued to decelerate largely on account of subdued demand-pull inflationary pressures as well as lower food prices. Average headline inflation for 2002 was 3.1 percent, more than a full percentage point below the government target of 4.5-5.5 percent and lower than the average of 6.1 percent in 2001. Similarly, BSP estimates of core inflation, which take out the effects of temporary disturbances on headline CPI by excluding food and fuel items, showed a decline during the period, confirming the absence of generalized price pressures at present .
  • The low inflation environment provided the backdrop for the continued expansion in the economy. Real GDP grew by 4.1 percent year-on-year in the first three quarters of 2002, fueled by the sustained growth in private consumption as well as a modest rebound in fixed capital spending. Nevertheless, other indicators suggested areas of weakness in overall demand conditions.
  • Prevailing labor market conditions remained generally soft as employment generation continued to be generally sluggish and unemployment relatively high. The softness in job market conditions precluded forceful calls from labor groups for wage adjustments.
  • The fiscal sector remained a focal concern for the economy, as revenue shortfalls raised the likelihood of a considerable overshoot of the earlier announced 2002 target deficit of P130 billion. Financial market activity nevertheless tended to favor government securities over equities as stock market sentiment remained cautious.
  • Growth in the money supply continued to be driven mainly by credits to the public sector, along with increases in net foreign assets due to inflows from exports and overseas workers’ remittances. Year-on-year growth in domestic liquidity or M3 accelerated steadily from 6.2 percent in the second quarter to 7.9 percent in the third quarter and improved further to 9.7 percent in October and 9.9 percent in November. The increase in credits to the public sector was fueled by the steady investor demand for government securities.
  • Bank lending posted a modest recovery as total outstanding commercial bank loans grew by 1.2 percent and 1.1 percent, respectively, from the year-ago levels in September and October 2002, reversing the year-on-year declines observed in previous months. This coincided with a decline in the non-performing loan ratio of commercial banks. The ratio of the Philippines’ 44 commercial banks (KBs) non-performing loans (NPLs) to total loans declined to 16.5 percent of total loans as of end-September compared to 17.8 percent as of end-July 2002.
  • Domestic interest rates increased slightly early in the fourth quarter but trended downward in November-December as ample liquidity continued to prevail in the financial system. The average benchmark 91-day Treasury bill rate fell from 5.3 percent in October to 5.2 percent in December.
  • The peso continued to weaken steadily during the fourth quarter, weighed down by market concerns over domestic security as well as the burgeoning fiscal deficit. The peso was also affected by the general depreciation in regional currencies, notably the Japanese yen.  However, the peso began appreciating in the second week of December on the strength of increased remittances from Filipinos working overseas.
  • Monetary authorities continue to expect generally manageable price conditions over the policy horizon, given muted demand-side pressures and transient and short-lived cost-side risks to future inflation. Average annual inflation is expected to move broadly in line with the government’s targets for 2003-2004. However, the inflationary risks from the impact on oil prices of a possible war in the Middle East and the uncertainty over the fiscal performance have a considerable bearing on the inflation outlook as well as inflation expectations and could, therefore, affect prospective monetary decisions.
  • At the same time, the greater risk of weaker global economic activity and the mixed signals regarding the strength of the domestic economic recovery suggest that ensuring appropriate liquidity conditions remains central to sustained economic recovery in the near term. However, it appears that past monetary stimulus is showing signs of exerting its impact on the real or productive sector of the economy. Although overall loan activity growth remains modest, the available evidence suggests a possible sustained rise in credit demand, which should lead to more vigorous consumption and investment activities.

With inflation contained and given the prevailing risks to global economic activity, monetary authorities believe that the present policy settings are compatible with the liquidity requirements of the economy, and that due recognition of the long lags in monetary policy will provide firmer indication of the extent to which the stimulatory impact of past monetary easing has worked its way through the system.

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