The present inflation environment continues to be benign, with year-on-year inflation in April 2003 slowing to 2.8 percent from 2.9 percent in the previous month and 3.6 percent a year earlier. The slowdown in April inflation was traced to slower increases in prices for both food and energy-related items, the latter attributed to the softening of international oil prices following the resolution of the US-Iraq war. The average inflation rate for the first four months of 2003 was 2.9 percent.
The BSP believes that the greater balance of available economic data continues to point to demand conditions that support a subdued inflation setting going forward. The relative absence of broad-based upward price pressures across consumer commodity groups is consistent with the continued mixed trends in various indicators of aggregate demand, the moderate pace of credit creation, restrained employment and wage conditions, and partial capacity utilization in key sectors such as manufacturing. At the same time, some of the main risks to future inflation associated with cost-push influences, notably the impact on farm prices of the El Niño phenomenon and adverse movements in world oil prices, have to some extent receded from the present environment. These conditions strengthen expectations that headline inflation will remain broadly in line with the National Government’s targets over the policy horizon. Equally important, they also highlight the greater risk of economic weakness faced by monetary authorities here as in other parts of the world.
This is not to say, however, that the risks to future inflation have altogether disappeared. The problem of exchange rate volatility and its implications for inflation expectations has presently subsided without recourse to sharp policy rate responses. Nevertheless, monetary authorities will continue to closely monitor economic and financial developments.
Moving forward, monetary policy will continue to provide a supportive environment, aimed at allowing an appropriate level of liquidity consistent with the economy’s growth requirements. At the same time, the BSP will continue to keep an eye on the possible risks to the inflation outlook.