Inflation Continues to Ease in 2Q 2015

Manila—(PHStocks)—Bangko Sentral ng Pilipinas (BSP)—The BSP has published the 55th issue of the quarterly BSP Inflation Report covering the period April-June 2015. 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 2Q 2015 BSP Inflation Report:

  • Inflation eases further. Year-on-year headline inflation continued to decelerate in 2Q 2015, slowing down to 1.7 percent from the quarter- and year-ago rates of 2.5 percent and 4.4 percent, respectively. Nonetheless, the year-to-date (ytd) average inflation of 2.0 percent remains within the National Government’s (NG) target range of 3.0 percent ± 1.0 percentage point for 2015. The continued deceleration in headline inflation was driven mainly by the slower increases in most food items as a result of adequate domestic supply. Non-food inflation likewise eased due to the decline in power rates and in the prices of domestic petroleum products. Similarly, measures of core inflation decreased further during the quarter.

  • Domestic demand conditions remain firm. Real gross domestic product (GDP) expanded by 5.2 percent in Q1 2015, slower than the NG’s growth target of 7.0-8.0 percent for the year. The weaker-than-expected growth in output was due largely to the slower pace of public spending and export growth on the expenditure side, and the deceleration in manufacturing activity on the production side. Nevertheless, firm household spending and service sector growth continued to support the economy. Moreover, high-frequency indicators of demand showed generally positive readings. Vehicle sales continued to be brisk, while the Purchasing Managers’ Index (PMI) remained above the 50-point expansion threshold. Business sentiment also remained broadly optimistic, although consumer confidence weakened on expectations of potential increases in commodity prices.
  • Global economic prospects generally improve, but the outlook across countries continues to diverge. Growth in the US remains on track, sustained by labor market gains and upbeat consumer sentiment. Economic activity in the euro area likewise continues to gain traction, with firm rates of growth seen in the core economies. By contrast, economic activity in Asia and other emerging markets have turned more subdued. The recovery in Japan is still modest, while China’s economy is weighed down by the downturn in the real estate sector. At the same time, the global inflation environment remains benign with the soft outlook for prices of international commodities, including oil.
  • Domestic financial market conditions are favorable. The continued manageable inflation environment and favorable domestic growth outlook supported market sentiment during the quarter. Optimism was also supported by other central banks’ decision to ease monetary policy settings during the quarter to support domestic economic activity and guard against downside risks to inflation. However, uncertainty surrounding the timing of the expected increase in US interest rates as well as the resolution of the Greek debt crisis tempered market sentiment. Nonetheless, domestic financial markets remained buoyant owing largely to investor confidence in the country’s macroeconomic fundamentals. Appetite for domestic equities and government securities stayed healthy, while spreads on the country’s sovereign debt instruments decreased. The Philippine banking system also continued to be sound and resilient as indicated by various metrics for capitalization as well as asset growth and quality.
  • The BSP maintains its policy settings during the quarter. The Monetary Board (MB) decided to maintain the BSP’s key policy interest rates at 4.0 percent for the overnight borrowing or reverse repurchase (RRP) facility, 6.0 percent for the overnight lending or repurchase (RP) facility, and the accompanying rates for term RRPs, RPs, and the Special Deposit Account (SDA) facility. The reserve requirement ratios were left unchanged as well. These decisions were based on the assessment that the inflation environment continued to be manageable, with the risks to the inflation outlook staying broadly balanced over the policy horizon and inflation expectations remaining well-anchored to the inflation target band.
  • Current monetary policy settings are appropriate. Latest baseline inflation forecasts show that inflation is likely to settle within the lower half of the target range of 3.0 percent ± 1.0 percentage point for 2015 and 2016. Risks to the inflation outlook continue to be broadly balanced. Pending petitions for power rate adjustments and the impact of stronger-than-expected El Niño dry weather conditions on food prices and utility rates are seen to pose upside risks to the outlook. Meanwhile, downside risks could stem from slower-than-expected global economic activity. Inflation expectations also remain well-contained following recent inflation outturns.

At the same time, domestic economic activity continues to expand at a solid pace. Domestic demand remains firm, supported by ample liquidity and sustained credit growth. Planned increases in government spending should also provide a lift to economic activity. Meanwhile, monetary policy normalization in advanced economies, particularly in the US, as well as uncertainty relating to the Greek debt crisis, with its implications on the euro area economy, could be important considerations for the inflation outlook in the quarters ahead to the extent that they influence inflation expectations and market sentiment on the domestic front.

Going forward, the BSP will continue to monitor domestic and external developments to ensure that the monetary policy stance remains consistent with its price and financial stability objectives.

The full text is also being released in electronic format (as a PDF file) on the BSP website (

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