The Bangko Sentral ng Pilipinas (BSP) announced today the release of the eighth issue of the quarterly BSP Inflation Report covering the period July - September 2003. The report was approved for public release by the Monetary Board at its meeting on 9 October 2003. The latest report was presented to an audience of journalists and economists in a press conference held at the Executive Business Center of the BSP.
The BSP Inflation Report is being published by the BSP as part of the BSP’s efforts toward greater disclosure and communication of its policy actions and decisions to the public. The Report is intended to convey to the public the overall thinking and analysis behind the BSP’s monetary policy decisions and to enable the public to better monitor the BSP’s commitment to the inflation target and thus help anchor the public’s expectations about inflation. The report presents the BSP’s view of the inflation outlook over its policy horizon, along with a survey of prevailing conditions for consumer prices, aggregate demand and output, the monetary and financial system, the labor market, the fiscal sector, and the international environment. A section is devoted to a discussion of the implications of the assessment of inflation and economic conditions on the monetary policy settings of the BSP. In certain cases, the report also contains box articles that offer more detailed information on issues relevant to monetary policy.
The main points discussed in the latest Inflation Report are summarized as follows:
Recent Developments in Inflation and Economic Conditions
- Inflation remains benign amid subdued demand and cost-side pressures. The inflation environment continued to be generally benign in the third quarter of 2003, with upticks driven mainly by changes in relative prices rather than generalized pressures on consumer prices. These developments reflect the continuing absence of significant demand-side pressures, and is supported by the benign trend for core or underlying inflation.
- The strength of aggregate demand remains generally moderate. The overall strength of aggregate demand remains generally moderate, with sluggishness observed in key areas such as manufacturing activity, employment, and exports.
Recent Monetary Conditions
- Money and credit demand are slowing down. Demand for money appears to have slowed down in the third quarter. M3 grew at a slower pace of 3.6 percent and 3.8 percent, respectively, in July and August, compared to 5.9 percent in June. Commercial bank lending has consistently risen in the eleven months to July 2003 but has recently been at a slowing pace. Consumer loan activity appeared to be generally sluggish as well, based on data on credit card receivables and auto loans by banks.
- Fiscal performance was within target in the first eight months of 2003. The fiscal position of the National Government (NG) remained on track in the first eight months of the year vis-à-vis the country’s fiscal program. The improved fiscal condition allowed a little flexibility for increased public spending in August to stimulate economic activity.
- Growth in the major economies picks up but risks to sustainability remain present. Economic growth in the world’s major economies is showing signs of picking up after months of slow and uneven recovery. Evidence of an economic upturn appears to be strongest in the United States, with milder improvements seen in the euro area and Japan. However, risks to sustainability remain present, given the possibility of further fallout in the equities market, still-weak corporate investment, continuing adjustments in global current account imbalances, and security concerns. In response, the major central banks have been cautiously optimistic and kept their policy interest rates on hold.
- The outlook for inflation remains tame over the policy horizon. Amid moderate improvements in aggregate domestic demand conditions, manageable pressures from the supply side and downside risks to global recovery, the BSP is maintaining its assessment of a tame inflation outlook over the policy horizon. Current BSP forecasts indicate that inflation will likely fall below the 4.5–5.5 percent inflation target for 2003, and settle broadly within the 4–5 percent target in 2004.
- However, some risks to the inflation outlook remain. Several factors are thought to exert some upward pressure on the price level. The first is the volatility of the exchange rate which, if left unchecked, could have a bearing on the public’s expectation of future prices. Meanwhile, attempts by the Organization of Petroleum Exporting Countries (OPEC) to control production to counter the rise in oil output from Iraq and other petroleum-producing countries could exert upward pressure on international oil prices, which could have pass-through effects on basic commodity prices as well as transport fares and wage rates.
Implications for the Monetary Policy Stance
- The BSP’s assessment of conditions for future inflation and output suggests need for a broadly accommodative monetary policy stance. A combination of benign future inflation and moderate economic activity would argue for an accommodative policy stance to ensure a steady pace of economic expansion. Indeed, additional evidence of slowing money and credit demand would also tend to bolster arguments for increasing the ongoing stimulus to economic activity. Current domestic monetary conditions, other economic developments and the likelihood of low and stable interest rates in the major economies provide flexibility for monetary authorities to assume a more supportive policy stance while remaining cautious of possible resurgence of inflationary threats.
- Nevertheless, such considerations must be weighed against the remaining risks to the inflation outlook. Specific risks include the possibility of renewed exchange market pressure in the face of concerns about political uncertainty and sustainability of fiscal performance. Proper consideration of such risks requires authorities to exercise continued caution in formulating the monetary policy stance. Hence, the BSP has kept its policy rates steady, a policy stance that recognizes the liquidity needs of economic growth against an essentially benign inflation outlook. Future assessments of monetary settings will therefore continue to emphasize prudence in responding to the evolving outlook for inflation and output growth in the economy.