Monetary Policy Tightens Further in Q3 2018

The Bangko Sentral ng Pilipinas (BSP) publishes today the 68th issue of the quarterly BSP Inflation Report covering the period July-September 2018. The full text is also released in electronic format as a downloadable PDF file on the BSP website.

The BSP Inflation Report is published as part of the BSP’s efforts to improve the transparency of monetary policy under inflation targeting and to convey to the public the overall thinking and analysis behind the Monetary Board’s decisions on monetary policy.

The following are the highlights of the Q3 2018 BSP Inflation Report:

  • Headline inflation increases further. Year-on-year headline inflation rose in Q3 2018 to 6.2 percent from the quarter ago-average of 4.8 percent. This brought the year-to-date average inflation to 5.0 percent, higher than the upper end of the National Government’s (NG) target range of 3.0 percent ± 1.0 percentage point for the year. Inflation pressures during the review quarter were attributed mainly to rising food and energy prices. Similarly, core inflation increased to  4.7 percent, higher than the rates posted in the previous quarter and a year ago. The BSP’s three alternative measures for core inflation were also higher during the quarter.
  • Domestic demand expands at a slower pace. Real gross domestic product (GDP) expanded by 6.0 percent in Q2 2018, slower than the 6.6-percent expansion registered both in Q1 2017 and Q1 2018. Average GDP growth for the first half of 2018 was 6.3 percent, also below the NG’s growth target of 7.0-8.0 percent for 2018. On the expenditure side, the slowdown in real GDP growth in Q2 2018 was due to the moderation in government and household consumption and acceleration of imports. On the production side, lower GDP growth was noted in the services, industry, and agriculture, hunting, forestry and fishing sectors. High-frequency real sector indicators of domestic economic activity presented mixed signals. The composite Purchasing Managers’ Index (PMI) remained firmly above the 50-point expansion threshold, pointing to sustained expansion across all sectors. Consumer confidence also remained positive during the quarter, while business outlook turned less optimistic. By contrast, vehicle sales eased due to the impact of the higher excise tax on automobiles, which was implemented earlier this year.
  • Prospects for global economic activity are broadly steady. Real GDP growth in the US accelerated in Q2 2018, reflecting faster increases in personal consumption expenditures, nonresidential fixed investment, exports, federal government spending, and state and local government spending. In the euro area, economic activity continued to expand due to an upturn in service sector activity as incoming new work rose. In Japan, real GDP growth was steady as domestic demand growth increased slightly during the quarter. Meanwhile, even as activity in China moderated in Q2 2018, aggregate growth in emerging Asian economies continued during the quarter, driven by a domestic demand-led pickup in India.
  • Domestic financial system remains stable and resilient. Volatility stemming mainly from the external environment has contributed to the depreciation of the peso and volatility in the Philippine stock market. The Philippine Stock Exchange index retreated during the review quarter while the peso continued to depreciate owing mainly to lingering concerns over trade tensions between the US and China. Meanwhile, sovereign debt spreads narrowed on account of some positive external developments while investor demand for government securities remained strong. In addition, the banking system saw continued growth in total assets, lending, and deposits, while capital adequacy ratios remained comfortably above the BSP’s prescribed levels and international norms.  Meanwhile, based on the latest round of the BSP survey on senior bank loan officers, bank lending standards for loans to both enterprises and households were broadly unchanged during the quarter, indicating a steady supply of credit.

The BSP raises key policy rates in Q3 2018. The BSP’s latest baseline forecasts using the 2012-based CPI series show that average inflation is likely to exceed the upper end of the target range in 2018 and may do so in 2019, even as inflation is expected to revert to within the target in 2020. However, the implementation of non-monetary mitigating measures, particularly the approval of rice tariffication, could temper further price pressures and thus lead to an earlier return of inflation to within the target range in 2019. Meanwhile, inflation expectations have also remained elevated amid indications of second-round effects.

With persistent signs of sustained and broadening price pressures, and the balance of risks skewing to the upside, the successive increases in the policy rate during the quarter were undertaken to further anchor inflation expectations and to safeguard the inflation target over the policy horizon. At the same time, amid continued uncertainty in the external environment, the BSP is closely monitoring recent fluctuations in the foreign exchange market and how the sustained pressures on the peso could affect inflation expectations and spill over to the demand side.

The BSP reassures the public of its strong commitment to take all necessary policy actions to address the threat of high inflation and deliver on its mandate of price stability.

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