Inflation is Broadly Steady in Q2 2017

The BSP publishes today the 63rd issue of the quarterly BSP Inflation Report covering the period April-June 2017. The full text is also released in electronic format as a downloadable 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 overall thinking and analysis behind the Monetary Board's decisions on monetary policy.

The following are the highlights of the Q2 2017 BSP Inflation Report:

Headline inflation holds steady. Average headline inflation was at 3.1 percent in Q2 2017, broadly unchanged from the quarter-ago average of 3.2 percent. This brought the year-to-date average to 3.1 percent, within the National Government's (NG's) target range of 3.0 percent 1.0 percentage point (ppt) for the year. Both food and non-food inflation were generally steady during the quarter. Higher prices of meat and fish were counterbalanced by lower prices of vegetable products. Similarly, price increases in transport and education services were offset by downward adjustments in the prices of domestic petroleum products. Meanwhile, core inflation increased to 2.9 percent in Q2 2017 from 2.7 percent in the previous quarter. Two out of the three alternative core inflation measures of the BSP were likewise higher.

The outlook for domestic economic activity stays firm. Real gross domestic product (GDP) rose by 6.4 percent in Q1 2017, albeit slower than the quarter- and year-ago expansion of 6.6 percent and 6.9 percent, respectively. Growth moderated due to the slowdown in household and government spending as well as in fixed capital investments, while higher imports weighed down on net total exports. The services and industry sectors likewise posted slower growth, offsetting the positive turnaround in agricultural production. Nonetheless, high-frequency indicators of demand continued to support the view of firm economic prospects in the near term. Vehicle sales remained brisk, while the composite Purchasing Managers' Index (PMI) stayed above the 50-point expansion threshold. Results of the BSP's latest surveys on business and consumer expectations also indicated a generally optimistic outlook.

Global economic activity continues to improve. Indicators of activity signalled a continued expansion in the US, euro area, and China, while slower growth was noted in Japan and India. Meanwhile, countries in the ASEAN region showed a mixed growth outlook. On balance, prospects for global economic growth have remained broadly positive, supported by favorable latest readings of economic activity indicators and benign inflation outturns.

Domestic financial markets withstand external volatility. Despite uncertainty stemming from the continuing normalization of US monetary policy as well as volatility in international oil prices, investor sentiment remained buoyant on the back of optimism over the country's sustained growth in Q1 2017 and the NG's proposed tax reform program. The peso appreciated, the stock market index rose, and spreads on the country's sovereign debt narrowed. Appetite for local government securities also remained healthy. At the same time, the Philippine banking system continued to be sound, as indicated by the sustained expansion in assets, loans, and deposits. Capital adequacy ratios also remained comfortably above international norms. Bank lending standards were also largely unchanged based on the latest results of the BSP's senior bank loan officers' survey, indicating a generally stable supply of credit.

The BSP leaves its monetary policy settings unchanged in Q2 2017. The BSP decided to maintain its key policy interest rate during its monetary policy meetings in May and June. The interest rates for other monetary policy instruments were accordingly also kept steady. Similarly, the reserve requirement ratios were left unchanged. The BSP's decision to maintain its policy stance was based on its assessment that the inflation environment remained manageable with inflation expectations firmly anchored to the inflation target over the policy horizon.

Current monetary policy settings remain appropriate. The BSP's latest baseline inflation projection path continues to track the midpoint of the government's target range in 2017-2019. The inflation path is also lower due in part to the decline in global crude oil prices, the moderation in domestic growth momentum, and the recent appreciation of the peso. Meanwhile, credit and liquidity conditions continue to be manageable, as placements in the BSP's open market operations remain healthy.

The balance of risks surrounding the inflation outlook also remains tilted to the upside, owing in part to possible adjustments in electricity rates as well as to the expected short-term impact of the NG's broad fiscal reform program. Lingering uncertainty in global economic prospects, however, continues to pose a key downside risk to the inflation outlook.

Accordingly, the BSP will maintain its vigilance in setting the stance of monetary policy 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.

Source: Bangko Sentral ng Pilipinas (BSP)

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