As expected, December inflation decelerated further to 3.9 percent year-on-year from 4.4 percent in November as inflation rates of all commodity groups continued to slow down. The December rate was the lowest observed since July 2000. The average inflation rate for 2001 was 6.0 percent, which is the lower end of the government’s 6-7 percent inflation target.
Going forward, the BSP’s assessment of various indicators support a generally benign outlook for inflation in 2002. This is based on expectations of a favorable trend in world oil prices, a broadly stable exchange rate, and stable food prices. Demand-pull inflationary pressures are likewise expected to be restrained, given weak external demand, the presence of excess capacity and moderating liquidity growth. Thus, the BSP expects monthly inflation to remain low well into the first half of 2002, with a slightly increasing trend toward the end of the year. The full-year average is expected to decelerate from 6.0 in 2001 toward the lower end of the 5-6 percent inflation target for 2002.
At the same time, while the benign inflation outlook supports the further relaxation of monetary policy in the near term, monetary policy will remain cautious and authorities will continue to monitor closely potential risks to the inflation outlook.