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Government Sets 4-5 Percent Inflation Target for 2004

02.07.2003

In line with the inflation targeting framework for monetary policy, the Government has set the official target for average annual inflation for 2004 at 4-5 percent.  The 2004 inflation target was set by the Development Budget and Coordination Committee (DBCC), an inter-agency government planning body,  in coordination with the BSP.  The inflation target is consistent with the Government’s objective for growth in economic activity, and reflects the likely developments in the monetary, fiscal and external sectors of the economy in 2004. 

The inflation targeting framework is now in its second year of implementation by the BSP.  Inflation targeting essentially involves the use of a formally announced inflation target set by the Government which the BSP commits to achieve over a two-year horizon.  Promoting price stability is the BSP’s main priority, and the target serves as an anchor or guide for the public’s expectations about future inflation.  

In the year ahead, the BSP’s assessment of the conditions influencing future price developments  points to a generally subdued inflation environment.  The upside risks that accompany the outlook for 2003 inflation—notably the  cost-push factors such as the impact of the El Niño weather phenomenon on food prices and the impact of  geopolitical factors on oil prices—are expected to be mitigated by subdued demand-pull influences resulting from  spare capacity in manufacturing, growing but still relatively subdued demand for credit, and generally soft labor market conditions.  Average inflation for 2003 is thus expected to be in line with the Government’s previously announced target of 4.5-5.5 percent for 2003.  

The BSP is fully committed to achieving the government’s inflation target through appropriate adjustments in its monetary policy instruments. Over the policy horizon, the monetary stance of the BSP will continue to emphasize prudence and,  as such, it will continue to monitor carefully the risks to stable prices and sustained economic activity.

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