The BSP announced today the publication of the nineteenth issue of the quarterly BSP Inflation Report covering the period April-June 2006. The full text of the Inflation Report was released today in electronic format (as a PDF file) and may be downloaded from the BSP website. A printed version will be made available by mid-August 2006. 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 Second Quarter of 2006:
- Price pressures have started to ease in the second quarter, as indicated by the deceleration in inflation. The slowdown in inflation was partly due to the recovery of agricultural production, which led to a moderation in food inflation. In addition, the relative stability of the peso during the period helped mitigate upward pressures on domestic prices of imported commodities such as oil. There was also relatively little evidence of demand-based price pressures as suggested by the easing in core inflation and the latest outturns for selected demand indicators.
- Despite higher growth in domestic liquidity, interest rates rose during the second quarter. The recent volatility in capital flows in emerging and global financial markets, triggered by concerns over the possibility of stronger-than-expected inflationary pressures and interest rate hikes in the US, led to a rise in domestic interest rates. These factors also resulted in a slight weakening of the peso against the US dollar during the second quarter.
- Global economic momentum continued to broaden. The United States and China remained the key engines of global economic growth, while Japan and the Euro area began to show clear signs of recovery. However, there are risks to the ongoing global economic expansion. These include soaring oil prices, the continued deterioration in the global current account imbalance, and the prospect of high interest rates as several central banks tighten their policy stance.
- Central banks in some of the major economies in the world continued to tighten their monetary policies. The US Federal Open Market Committee raised its target for the federal funds rate by 25 basis points in June. The European Central Bank raised its policy interest rate by 25 basis points in the same month to help ensure that medium to long-term inflation expectations remain solidly anchored. Meanwhile, the Bank of England and the Bank of Japan kept their policy settings unchanged in June.
- For its part, the Monetary Board decided to keep the BSP’s policy rates steady during the second quarter as the inflation outlook continued to suggest a possible deceleration in inflation towards the 4.0-5.0 percent target in 2007. In addition, core inflation and other recent data also continued to paint a scenario of limited demand-based pressures in the near-term. These conditions suggested an outlook of manageable inflation over the policy horizon.
- However, monetary authorities also believe that the balance of risks to the inflation outlook remains tilted toward the upside, linked mainly to movements in oil prices. The prospect of continued oil price increases over the next few months, along with expected adjustments in domestic power costs, point to a continuing environment of supply-side pressures. Such a prospect increases the risks to inflation expectations and the likelihood of second-round effects, particularly on wage-setting.
- The BSP remains strongly committed to achieving the inflation target for 2007 and addressing the risks to future inflation. Managing the risks to inflation expectations and the risk of second-round effects in wage- and price-setting, remains a key policy priority. The Monetary Board continues to stand ready to act upon escalating risks to the outlook for inflation and to inflation expectations of the public. At the same time, the BSP will continue to articulate its support for the Government's use of non-monetary measures to address supply-side risks to basic commodity prices and coordinate with concerned government agencies for this purpose.
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