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Government Raises 2005 Inflation Target to 5-6 Percent


Upon the representation of the BSP, the Development Budget Coordination Council (DBCC), the inter-agency planning body responsible for setting economic targets for the National Government,  has revised the National Government’s inflation target for 2005 from 4-5 percent to 5-6 percent.  The target for 2006, however, remains at 4-5 percent and those for the succeeding years over the medium term at 3-4 percent.  Under the BSP’s inflation targeting framework for monetary policy, the targets for inflation are set by the DBCC in consultation with the BSP.

The medium-term targets for inflation will be as follows:


Inflation Target (Annual average in percent)

 2005             5.0-6.0
 2006  4.0-5.0
 2007-2010  3.0-4.0

The revision of the 2005 target was made in the light of two considerations.  Firstly, the NSO’s shift to the new 2000-based CPI series implies that headline inflation will tend to be higher because of the changes in the weights and components of the CPI basket.  Available data suggests that, on average, 2000-based CPI inflation tends to be higher than the 1994-based inflation by about half a percentage point.  In 2004, for example, inflation averaged 5.5 percent based on the 1994 CPI series and 6.0 percent using the 2000 CPI series.  Authorities believe that the dynamics of the new inflation series should be reflected in the inflation target.

Second, significant supply-side risks to inflation continue to loom over the policy horizon.  The BSP has recently stated that while future inflation, based on the latest forecasts by the staff, is on a downtrend, average headline inflation is still expected to exceed 5 percent in 2005.  Renewed pressures on oil prices as well as the impact of new tax measures were also considered critical in calibrating the new inflation target.

The BSP wishes to emphasize that the adjustment in the target is intended solely to reflect the dynamics of the new inflation data series and account for additional inflation risks that have emerged since the target was originally set in 2004. Monetary authorities remain fully committed to achieving through the appropriate adjustments in its monetary policy instruments, and are now even more vigilant against possible second-round effects from supply shocks and are intensifying coordination with other public agencies particularly the Department of Agriculture (DA) and the Department of Trade and Industry (DTI).  Equally important, the BSP remains fully committed to achieving a measured disinflation over the medium term, as reflected in the 3‑4 percent inflation target for the period 2007-2010.

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