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January Inflation Inches Up to 2.7 Percent

02.05.2003

Inflation inched up to 2.7 percent year-on-year in January 2003, in line with market expectations. At this level, the January inflation rate was slightly higher compared to the 2.6 percent year-on-year inflation in December 2002. However, this was significantly below the 3.8 percent inflation registered in January 2002 and well within the BSP’s forecast of 2.5-3.0 percent.

The slight increase in inflation was due mainly to the upward adjustments in fuel prices, which fed into the cost of services, and in water charges during the month. The level of inflation remains consistent with the outlook of a generally subdued inflation environment in the near term, although there are foreseeable risks to inflation in the months ahead in the form of cost-push pressures arising from the potential impact on the prices of agricultural products of the El Niño weather disturbance and a likely further increase in oil prices due to escalating tensions in the Middle East. Despite these risks, average inflation in 2003 is likely to be within the government’s full-year target of 4.5–5.5 percent.

The monetary authorities noted that the vigor displayed by the economy in 2002 provides a firmer basis for the country’s growth prospects going forward. This expectation coupled with the likelihood of a weaker-than-expected global economic recovery underscore the need for monetary policy to continue to provide a supportive environment by ensuring that sufficient liquidity is available to fuel the economy’s growth requirements, while guarding firmly against any potential build-up of price pressures.

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