Inflation Remains Benign in Q3 2013

Manila—(PHStocks)—The Bangko Sentral ng Pilipinas (BSP) announced the publication of the 48th issue of the quarterly BSP Inflation Report covering the period July-September 2013. The full text has been released in electronic format (as a 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 thinking and analysis behind the Monetary Board’s decisions on monetary policy.

The following are the highlights of the Q3 2013 BSP Inflation Report:

• Headline inflation eases further due to lower prices of non-food items. Year-on-year headline inflation decreased to 2.4% in Q3 2013 from 2.7% in Q2 2013, bringing the year-to-date (ytd) average inflation rate to 2.8%, slightly below the Government’s inflation target range of 4% ± 1.0 percentage point for 2013. This was due mainly to slower non-food inflation, owing to lower electricity rates. Inflation for most food items also declined, reflecting adequate domestic supply of corn, meat, fish, milk, fruits, vegetables, and sugar. Similarly, the official measure of core inflation, along with the alternative measures of core inflation measured by the BSP, was lower in Q3 2013 than in the previous quarter, indicating a relative absence of broad-based inflationary pressures. The official core inflation eased to 2.2%. The number of CPI components showing inflation rates above the 5% threshold likewise decreased, accounting for a smaller proportion of the CPI basket.
• Domestic demand remains buoyant. Real gross domestic product (GDP) expanded by 7.5% in Q2 2013, supported by strong household spending and capital formation on the expenditure side and by solid gains in the services sector on the production side. Indicators of demand also continue to trend higher given generally favorable consumer and business sentiment. Vehicle and energy sales have been firm, while the Purchasing Managers’ Index (PMI) continues to signal strong new orders and production. Sustained credit growth and ample liquidity are also seen to provide a further boost to domestic demand going forward.
• Prospects for global growth continue to be modest amid downside risks. The economic recovery in advanced economies (AEs), particularly in the US and Japan, has strengthened modestly, while economic activity in the euro area continues to stabilize. However, the pace of growth in major emerging markets (EMs), particularly in China, has decelerated due to weaker domestic demand. Consequently, the IMF reduced its global growth projections in October but notes that latest indicators point to somewhat improved prospects in the near term. A further slowdown in emerging and developing economies represents a key downside risk to the global growth outlook. At the same time, tighter financial conditions associated with the eventual exit of the US Federal Reserve from its unconventional monetary policies could have adverse spillovers on EMs. Meanwhile, inflation pressures are seen to remain subdued. The inflation environment in AEs continues to be benign given their sizeable spare capacity, while softer demand in emerging economies should help temper increases in the international prices of commodities.
• Uncertainty weighs down on local financial markets. Local financial markets continued to be weighed down by lingering uncertainty over the timing of the anticipated exit from quantitative easing in the US. The decision of the US Federal Reserve to maintain the pace of its asset purchases in September propelled rallies across global financial markets. However, the impasse among US lawmakers over passing a new fiscal budget and raising the debt ceiling tempered market optimism. In the Philippines, the stock market index retreated, the peso weakened against the US dollar, and spreads on Philippine debt widened, indicating renewed risk aversion. Nonetheless, demand for T-bills remained robust, reflecting strong buying interest from investors as well as ample liquidity in the market. Money supply also continued to expand, buoyed by brisk credit activity.
• The BSP maintains its policy settings during the quarter. During its monetary policy meetings on 25 July and 12 September, the Monetary Board (MB) decided to keep its policy interest rates steady based on its assessment of a benign inflation environment, with baseline forecasts broadly in line with the announced inflation targets for 2013-2015. The MB also noted that the balance of risks to the inflation outlook has shifted slightly toward the upside given more volatile international oil prices. Nonetheless, global economic prospects are seen to remain subdued, tempering pressures on world commodity prices.
• Prevailing inflation and output dynamics support the maintenance of current monetary policy settings. Baseline forecasts indicate that inflation will continue to track the lower bound of the inflation target range for 2013. Inflation is also likely to remain within-target in 2014 and 2015. While the risks to the inflation outlook are slightly skewed to the upside, inflation dynamics remain favorable given benign inflation readings and well-anchored inflation expectations. Firm indications of domestic demand suggest that prevailing monetary policy settings remain appropriately calibrated to support non-inflationary growth. Moreover, the temporary period of strong liquidity growth is not expected to translate into significant inflationary pressures given the continued improvement in the economy’s absorptive capacity. Keeping a steady hand on policy levers is also prudent given the challenging global economic environment, as it provides monetary authorities some scope to further evaluate the impact of recent fine-tuning measures in the BSP’s special deposit account (SDA) facility.

Going forward, the BSP will continue to monitor evolving price and output conditions to ensure that the monetary policy stance remains consistent with maintaining price and financial stability while supporting sustainable economic growth. The BSP also stands ready to deploy appropriate measures as needed to address pre-emptively any potential misalignments in asset prices.

[On 24 October 2013, the MB decided to maintain the BSP’s key policy rates at 3.5% for the overnight borrowing or RRP facility and 5.5% for the overnight lending or repurchase (RP) facility. The interest rates on term RRPs, RPs, and SDAs were also left unchanged accordingly. Reserve requirement ratios were kept steady as well.]