Inflation Remains within Target in 2013

Manila–(PHStocks)–The Bangko Sentral ng Pilipinas (BSP) has announced the publication of the 49th issue of the quarterly BSP Inflation Report covering the period October-December 2013 (full text can be found here).

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 4Q 2013 BSP Inflation Report:

  • Inflation remains within the target range in 2013. Inflation for the whole year of 2013 averaged 3 percent. In 4Q 2013, inflation accelerated to 3.4 percent from the quarter-ago rate of 2.4 percent due to higher food and non-food inflation. Food inflation increased owing to tighter domestic supply conditions from weather-related disruptions as well as stronger demand during the holiday season. Non-food inflation rose similarly due to higher electricity rates on account of the increased generation charges at the Wholesale Electricity Spot Market. Similarly, core inflation was higher in 4Q 2013 than in the previous quarter, but remained lower compared with year-ago rates. The number of CPI components showing inflation rates above the 5 percent threshold likewise increased, accounting for a bigger proportion of the CPI basket.
  • Domestic demand remains firm. Real gross domestic product (GDP) expanded by 7 percent in Q3 2013, driven by strong household spending, exports, 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 be solid given generally favorable consumer and business sentiment. Vehicle and energy sales remain brisk, while the Purchasing Managers’ Index (PMI) continues to signal strong growth in new orders and production, especially in the services sector. Sustained credit growth and ample liquidity are also seen to provide a further boost to domestic demand going forward.
  • Prospects for global growth strengthen. The US economy continues to show signs of firmer recovery amid buoyant private demand and a steady improvement in employment conditions. Economic activity in Japan also has been robust, supported by accommodative monetary and fiscal policy. Meanwhile, the recovery in the euro area remains modest. The pace of growth in key emerging markets appears to be decelerating due to weaker domestic demand. While the global outlook continues to be surrounded by some uncertainty, the IMF is expected to raise its global growth forecast for 2014 as the outlook for the US economy improves. Inflation pressures are also seen to remain broadly subdued. The inflation environment in AEs continues to be benign given sizeable spare capacity. By contrast, inflation has risen in some emerging economies owing to domestic supply factors.
  • Local financial markets see modest gains. Moody’s decision to upgrade the Philippines’ credit rating to investment grade, reflecting the continued positive outlook on the Philippine economy, lifted market confidence in early 4Q 2013. However, concerns over the potential impact of Typhoon Yolanda and the decision by the US Federal Reserve to start tapering its monthly bond purchases in January dampened investor sentiment toward the end of the review quarter. Nonetheless, the country’s debt spreads narrowed, while the peso maintained its stability. However, the stock market pared its gains with the main index retreating from its level in the previous quarter.
  • The BSP maintains its policy settings during the quarter. During its monetary policy meetings on 24 October and 12 December, the Monetary Board (MB) decided to keep policy interest rates steady based on its assessment of a manageable inflation environment, with the future inflation path expected to be within the announced target over the policy horizon. The MB also noted that the balance of risks to the inflation outlook remained tilted slightly toward the upside due to potential increases in food prices as well as possible further adjustments in power rates. Meanwhile, inflation expectations continue to support the within-target inflation outlook.
  • Prevailing inflation and output conditions suggest that monetary policy settings remain appropriate. Baseline forecasts indicate that inflation will likely settle within the inflation target ranges for 2014 and 2015. Underlying demand-side pressures continue to be manageable, while inflation expectations remain firmly anchored. Moreover, the temporary period of strong liquidity growth is not expected to translate into significant inflationary pressures given the temporary nature of the adjustments related to the BSP’s new guidelines on the access of trust entities to the Special Deposit Account (SDA) facility. At the same time, the rising demand for money appears to be consistent with sustained improvements in the economy’s absorptive capacity. Nonetheless, the risks to future inflation appear to be skewed to the upside due mainly to transitory supply-related pressures. This highlights the need to communicate the importance of non-monetary measures being undertaken by other government agencies to promptly address supply-side price pressures and manage inflation expectations.

Going forward, the BSP remains guided by its primary objective of maintaining price and financial stability. The BSP stands ready to deploy appropriate measures as needed to ensure sustainable and broad-based economic growth.

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