Economic Outlook

2017 Inflation and Monetary Policy Update

 

 

PH headline inflation entered the 2-4% range in September 2016 and has remained there since then. Interest rates are likely to increase in 2017 as inflation has been picking up in the past months.

 

Headline inflation reached 2.8% in July 2017. This was preceded by 2.7% in June, 3.1% in May, and 3.4% in April. The increase in July is due to higher prices of housing & utilities (+2.2%), transport (+3.8%), education (+2.3%), and restaurant and other miscellaneous services (+2.1%). Core inflation, which excludes selected food and energy items, decreased to 2.1% in July, preceded by 2.6% in June, 2.9% in May, and 3.0% in April.

 

In the BSP’s latest quarterly inflation report last June, it noted that average mean projections for 2017 were lower at 3.3% as compared to the previous quarter’s 3.4%. For 2018, forecasts were lower at an average 3.4% compared to 3.5%. According to the BSP, analysts cited slower oil price increases due to US shale oil, lower electricity rates due to Meralco refunds to customers, and continued uncertainty in global economic prospects as factors contributing to their lower 2017 forecast. The BSP noted that key upside risks to the inflation outlook are PHP depreciation, proposed tax reform, government infrastructure spending, transport fare hikes, adverse weather conditions during the rainy season, a potential Fed hike in 2H’17, and US protectionism.

 

During its latest policy meeting last August 10, 2017, the BSP raised its own 2017 inflation forecast to 3.2% from 3.1% while its 2018 forecast increased to 3.2% from 3.0%. The higher inflation path is due to the increase in domestic liquidity & credit growth and continued peso depreciation from a weaker current account balance. Nevertheless, the Monetary Board maintained its key monetary policy settings as the inflation environment is assessed to remain manageable. Particularly, the BSP maintained the current RRP (borrowing) rate at 3.0%, the current overnight deposit and overnight lending rates at 2.5% and 3.5%, respectively, and the current reserve ratio requirement at 20% for universal and commercial banks, 8% for thrift banks, and 5% for rural banks.

 

The outlook for domestic economic activity continues to be firm, supported by buoyant consumer and business sentiment and ample liquidity. Credit activity also continues to expand in line with output growth, indicating sustained improvement in the economy’s absorptive capacity, thus mitigating inflation pressures over the long run. BSP Governor Nestor Espenilla, Jr. explained the Monetary Board will continue to pay close attention to the evolving economic growth and liquidity conditions and their implications for price and financial stability.

 

Appendix: Inflation by Commodity Group

 

 

 

 

 

 

Weight

FY

2016

May 2017

Jun 2017

Jul 2017

 

 

 

 

 

 

All Items

100.0

1.8

3.1

2.7

2.8

Food and Non-Alcoholic Beverages

39.0

2.5

3.8

3.5

3.3

Alcoholic Beverages and Tobacco

2.0

5.7

6.1

6.2

6.2

Clothing and Footwear

3.0

2.3

2.2

2.1

2.1

Housing, Water, Electricity, Gas, and other Fuels

22.5

-0.2

3.6

2.1

2.2

Furnishing, Household Equipment and Routine Maintenance of the House

3.2

1.9

2.4

2.1

2.0

Health

3.0

2.4

2.5

2.4

2.4

Transport

7.8

0.3

3.2

2.4

3.8

Communication

2.3

0.1

0.3

0.2

0.2

Recreation and Culture

1.9

1.6

1.5

1.2

1.2

Education

3.4

2.6

1.8

2.2

2.3

Restaurants and Miscellaneous Goods and Services

12.0

2.1

1.5

1.7

2.1

 

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