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Government Sets 4-5 Percent Inflation Target for 2005

12.19.2003

Consistent with the BSP’s inflation targeting framework for setting monetary policy, the Philippine Government announced today the official target for average annual inflation for 2005 at 4-5 percent. The target for 2004 remains at 4-5 percent. The 2005 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 economic growth objective of 4.9–5.8 percent for 2004 and 5.3-6.3 percent for 2005, all in real GDP terms. This target also reflects the likely developments in the monetary, fiscal and external sectors of the economy moving forward.

Average annual headline inflation is expected to settle at around 3 percent in 2003, well below the Government’s target of 4.5-5.5 percent for the year. For 2004-2005, the BSP expects a moderate rise to 4-5 percent, in line with the Government’s targets. The expected moderate increase essentially reflects the impact of improved output growth and aggregate demand conditions as well as the expected cost-push impact of factors such as the volatility in oil prices. At the same time, the inflation outlook also considers the risks stemming from financial market concerns over domestic political conditions in the run-up to the May 2004 elections, which may influence the direction and movement of the nominal exchange rate and other financial variables with potential inflationary effects. Additional upside risks may also come from planned adjustments in import tariff rates and utility charges.

Inflation targeting is an approach to monetary policy that involves the use of a publicly 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 for the public’s expectations about future inflation, allowing them to plan ahead with greater certainty. The BSP remains fully committed to achieving the Government’s inflation target through appropriate adjustments in its monetary policy instruments. Over the policy horizon, the stance of monetary policy of the BSP will continue to emphasize prudence with respect to the risks to price stability and sustained economic activity.

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