MANILA, Philippines – Slower increases in most food items resulted in the continued decline of headline inflation for the third quarter, the Bangko Sentral ng Pilipinas (BSP) reported Friday, October 23.

In the 56th issue of BSP’s quarterly inflation report, non-food inflation likewise decreased due to the decline in power rates and in the prices of domestic petroleum products from July to September this year.

Year-on-year headline inflation continued to decelerate in the third quarter, slowing down to 0.6% from the quarter- and year-ago rates of 1.7% and 4.7%, respectively, thus bringing the year-to-date (ytd) average inflation to 1.6%, which is below the national government’s target range of 3% ± 1.0 percentage point for 2015. (READ: Inflation continues to drop, hits 0.4% in September)

Inflation, the rate at which prices of goods and services rise, has steadily been easing from 2.5% in February; 2.4% in March; 2.2% in April; 1.6% in May; 1.2% in June; 0.8% in July; and 0.6% in August.

“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 weather conditions on food prices and utility rates are seen to pose upside risks to the outlook, while downside risk could stem from slower-than-expected global economic activity,” the BSP added.

Domestic, external factors

Domestic demand stayed intact, as real gross domestic product (GDP) expanded by 5.6% in the second quarter this year, driven mainly by accelerated consumer and government spending as well as increased investments on the demand side and by the resilient service sector growth on the production side.

High-frequency indicators of demand reported positive signals, as vehicle sales remained brisk, while the composite Purchasing Managers’ Index (PMI) stayed above the 50-point expansion threshold.

Business and consumer sentiment for the next quarter also turned upbeat, supported by bright prospects for the holidays as well as broadly favorable macroeconomic conditions.  

Economic prospects across the globe continue to vary though, as growth in the US accelerated, reflecting upturns in exports, personal and government consumption, as well as non-residential fixed investment.

Economic activity in the euro area also remained firm, with leading indicators pointing to new incoming businesses.

By contrast, economic activity in Asian economies was more subdued, as Japan continued to register a modest recovery and as growth in China and India eased.

Softer growth in emerging markets also dragged down global economic output and weighed down overall prospects for growth. Thus, a number of central banks across the globe responded by easing their monetary policy settings to support domestic economic activity amid lower oil and commodity prices. (READ: For the 8th time, key interest rates still unchanged)

The BSP maintained its monetary policy settings during the quarter. The Monetary Board decided to maintain the BSP’s key policy interest rates at 4% for the overnight borrowing or reverse repurchase (RRP) facility, 6% 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 benign inflation outlook and the economy’s underlying growth momentum provide ample room to keep monetary policy settings unchanged,” BSP said. (READ: The interest rate and you)

On September 30, BSP announced  its plan to implement, by the second quarter of 2016, an interest rate corridor (IRC) system aimed at introducing key changes in the framework for monetary operations.

“The shift to IRC will not represent a change in the BSP’s monetary policy stance and is not expected to have a significant impact on the general level of interest rates. Moreover, the IRC is expected to support the development of capital markets by providing an enabling environment for increased money market transactions and active liquidity management by banks,” the BSP said.

Ample liquidity and robust credit growth also continued to support the favorable domestic growth outlook, the BSP added.

“However, external headwinds emanating from the slowdown in the Chinese economy and from uncertainty surrounding the US interest rate lift-off drove up risk aversion and the search for safe-haven assets,” the central bank also said.

It added that the Philippine Stock Exchange Index dipped, the peso depreciated, and spreads on the country’s sovereign debt instruments widened, reflecting investors’ concerns over potential spillover effects of slowing growth across emerging markets.

“Nonetheless, investor appetite for local government securities remained healthy. 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. 

“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,” BSP said.

Private sector forecast

Results of a BSP survey of private sector economists in September also showed a lower mean inflation forecast of 1.7% for this year instead of the 2.3% average in the June survey and 2.7% in the March survey.

The survey also revealed a lower mean inflation forecast of 2.7% instead of 3.1% for 2016, and 2.9% instead of 3% for 2017.

“The analysts attributed their lower inflation expectations mainly to lower international food and oil prices. These are likely to outweigh the upside risks brought by the El Niño phenomenon, the possible Federal rate hike, increased expenditure from the upcoming election, holiday spending, and the normalization of oil prices,” the BSP said. – Rappler.com