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BSP Releases Inflation Report for the Fourth Quarter of 2004

01.27.2005

Bangko Sentral ng Pilipinas Governor Rafael B. Buenaventura announced today the publication of the thirteenth issue of the quarterly BSP Inflation Report covering the period October-December 2004.  The full text of the Inflation Report has been released today in electronic format (as a PDF file) and may be downloaded from the BSP website.  A print version will be made available by end-February 2005.  The BSP Inflation Report is being published as part of the BSP’s transparency mechanism under inflation targeting and to convey to the public the overall thinking and analysis behind the BSP’s decisions on monetary policy. 

The following are the highlights of the BSP Inflation Report for the Fourth Quarter 2004:

  • Headline inflation was higher than in the previous quarter, driven largely by supply-side factors such as the increases in the prices of food and energy-related items.  The seasonally stronger demand during the holidays also contributed to the uptick in inflation in the fourth quarter.  Likewise, core inflation, defined by the National Statistics Office (NSO) as the rate of change of headline CPI after excluding selected food and energy items, was higher compared to the previous quarter. 
  • The overall pace of economic activity continued to be driven by strong private consumer spending, as well as by robust export growth.  On the production side, the growth was broad-based as all major sectors posted higher growth compared to year-ago levels.  Nevertheless, indications of slack in economic activity remained, notably the sizeable unemployment rate and moderate lending and investment activity.  The outlook for growth is also partly dampened by evidence of reduced business and consumer optimism based on the results of the latest BSP-conducted surveys.      
  • Growth in money and credit demand remained moderate in the fourth quarter.   The average year-on-year growth in domestic liquidity or M3 for October-December 2004 improved slightly to 6.3 percent from 6.0 percent in the preceding quarter.  Loans outstanding of commercial banks grew modestly by 3.6 percent year-on-year in November 2004, following a similar increase in October.    
  • The fiscal position of the National Government (NG) in 2004 was better than the target and year-ago levels.  The NG’s budget deficit in 2004 stood at P186.1 billion, 5.9 percent below the program of P197.8 billion and 6.9 percent lower than the deficit level in the previous year.  This marked the second consecutive year that the NG outperformed its fiscal deficit goal, affirming the fiscal authorities’ steadfast resolve to achieve fiscal consolidation. 
  • Global economic growth continued to show signs of moderation but overall economic activity remained robust.  Industrial production and private consumption appeared to have slowed down in most economies while export gains tapered off due mainly to the weakening of the US dollar.  The presence of global imbalances, such as the large fiscal and current account deficits of the US, alongside the continued volatility in world oil prices and the transition towards higher interest rates present downside risks to the world economic outlook. Monetary policy developments in major economies reflected these conditions and outlook.  The US Federal Reserve raised the US fed funds target rate by 25 basis points to 2.25 percent in December 2004.  By contrast, the Bank of Japan, the European Central Bank and the Bank of England kept their monetary policy settings unchanged during the fourth quarter.  
  • The BSP kept monetary policy settings unchanged during the quarter.  This was based on the assessment that supply factors continued to be the main driver of the inflationary process while demand-side influence on prices remained limited.  Moreover, Philippine interest rate differentials with those of the US were considered comfortable.  Differentials between the RP 91-day T-bill rate (net of RP withholding tax) and the 90-day LIBOR and 90-day US T-bill were 374.3 basis points and 398.8 basis points, respectively, as of end-December 2004.  Meanwhile, the BSP continued to voice its support for direct non-monetary government measures to address supply-side risks.    
  • The latest evidence indicates that although current inflation is rising, future inflation is on a downtrend.  Inflation is expected to decelerate beginning March 2005, and is likely to settle around 5 percent by the fourth quarter of 2005. The 2005 inflation target is still likely to be exceeded, but average inflation in 2006 should fall within the target range.  
  • However, the outlook for prices is not altogether risk-free.  Supply-side pressures from oil prices and other sources continue to loom over the policy horizon, and the risk of demand-side effects from these supply shocks could very well increase in the near term and spill over into wage- and price setting behavior.
  • The outlook for inflation supported keeping policy settings unchanged, but also argued for continued readiness by authorities to act quickly against potential spillover demand-side pressures.  Monetary policy action may be undertaken when the available evidence begins to point more strongly to the following conditions: (1) the emergence of demand-side pressures on consumer prices; (2) the emergence of inflationary pressures that are over and above those generated by ongoing supply shocks; and (3) an increased risk of possible exchange rate market pressures arising from narrowing interest rate differentials which could feed into inflation and inflation expectations.  
  • Prospective decisions will be oriented mainly toward safeguarding the 2006 inflation target, since monetary actions undertaken at this point will primarily affect inflation in 2006 and have only a minimal impact on 2005 inflation.  

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