Inflation within target for 6th consecutive year – BSP

MANILA, Philippines – Inflation remained within target in 2014, hitting a full-year average of 4.1% – the 6^th consecutive year that it remained within the official target range beginning 2009, the Bangko Sentral ng Pilipinas (BSP) highlighted in its 4^th quarter inflation report released Friday, January 23.

The report noted that food inflation declined owing to ample domestic supply of key food items, while non-food inflation decelerated as electricity rates and the prices of domestic petroleum products declined.

Similarly, core inflation and all alternative measures of core inflation estimated by the central bank were lower in the last quarter of 2014, relative to the rates registered in the previous quarter.

The number of Consumer Price Index (CPI) components showing inflation rates above the 5% threshold also decreased, accounting for a slightly smaller proportion of the CPI basket, BSP said.

Domestic demand stays firm

The report also noted that domestic demand is seen to stay firm, while real gross domestic product (GDP) growth moderated to 5.3% in the third quarter of 2014 but remained above the average growth for the period Q1 1999-Q3 2014.

The weaker-than-expected growth was largely due to the contraction in the agriculture sector and in public administration and defense on the production side, and to the slowdown in government spending on the expenditure side.

But domestic demand has kept the economy afloat, boosted by strong private spending and the recovery of capital formation.

External trade likewise improved.

Vehicle sales also stayed brisk, while the Purchasing Managers’ Index (PMI) continued to signal an expansion in domestic economic activity.

Business and consumer sentiments turned more upbeat, supporting the view that underlying domestic demand will remain firm in the near term amid robust credit growth and steady improvements in employment conditions, the BSP said.

Diverse global growth prospects    

Growth prospects across countries continue to diverge, the BSP noted in its 53^rd inflation report.

The US economy continued to show signs of a solid recovery, due to strong domestic demand and a moderate rise in exports.

But output in Japan contracted further, mirroring the continued decline in private spending due to the consumption tax hike in April 2014.

Growth in major emerging markets (EMs), particularly in China and India, remained modest, while the recovery in the euro zone continued to be fragile.

Also, the risks to the global growth outlook was tilted to the downside due largely to lingering geopolitical risks in the Middle East; the potential rise in interest rates amid the ongoing monetary policy normalization in the US; and the potential increase in risk aversion owing to the deepening economic crisis in Russia.

Global inflation pressures are expected to stay manageable, particularly as oil prices remain low amid ample global production and weak demand for oil.

Uncertainty remains

Uncertainty over the global growth outlook drives financial market sentiment, the BSP reported.

The peso weakened against the dollar as indications of a solid recovery in the US are marked by the conclusion of the US Fed’s quantitative easing program in October that drove expectations of a potential increase in US interest rates sometime in 2015.

Nonetheless, local stock trading remained generally buoyant on easing domestic inflation concerns, strong corporate earnings, and Moody’s upgrade of the Philippines’ credit rating to two notches above minimum investment grade.

The BSP also maintained its policy settings during the last quarter of 2014, specifically 4% for the overnight borrowing and 6% for overnight lending, while the interest rates on special deposit accounts and the reserve requirement ratios were also unchanged.

Current monetary policy settings are appropriate, as latest forecasts indicate a within-target inflation outlook, with a lower baseline projection for 2015 due to easing international oil and rice prices.

The risks to the inflation outlook also remain broadly balanced, supporting expectations of a manageable inflation environment going forward.

But pending petitions for utility rate adjustments and potential power shortages could pose upside risks to the inflation outlook, while downside risks could arise from the impact of slower-than-expected global economic activity on international commodity prices.

BSP Governor Amando Tetangco Jr previously said the central bank’s efforts to maintain macroeconomic stability made the economy more resilient in the face of challenges essentially coming from the external sector.

“The monetary authority is prepared to take appropriate measures as needed,” Tetangco said. – Rappler.com