Inflation averages 2.6% in 2020

The Bangko Sentral ng Pilipinas (BSP) published the 77th issue of the quarterly BSP Inflation Report covering the period October-December 2020.

The full text of the report is being released in PDF format on the BSP website (https://www.bsp.gov.ph/SitePages/MediaAndResearch/Inflation%20Report.aspx).

The BSP Inflation Report is being 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 Q4 2020 BSP Inflation Report:

 

Average headline inflation remains within the target range in 2020. Year-on-year (y-o-y) headline inflation rose to an average of 3.1% in Q4 2020 from the year- and quarter-ago rates of 1.6% and 2.5%, respectively.

This brought the full-year average inflation rate to 2.6%, within the National Government’s (NG) target range of 3.0% ± 1.0%age point for the year. Food inflation drove the faster inflation during the quarter as adverse weather conditions and supply distribution bottlenecks led to higher prices of agricultural products.

Meanwhile, core inflation was steady at 3.2% in Q4 2020 from the previous quarter. Preliminary estimates of alternative core inflation measures computed by the BSP showed mixed trends during Q4 2020.

The BSP’s survey of inflation expectations of private sector economists as of December 2020 indicates slightly higher mean inflation forecasts for 2020 and 2021 relative to the September 2020 survey. Meanwhile, the mean inflation forecast for 2022 was unchanged. Analysts expect inflation to remain benign in the near term, with risks to the inflation outlook tilted to the upside as the economy gradually reopens. The key upside risks to inflation include food supply disruptions due to the weather disturbances and a rebound in global oil prices, while downside risks to inflation are seen to emanate from subdued domestic demand and its impact of commodity prices as well as from the strong peso against the US dollar.

 

The domestic economy contracts anew in Q3 2020. Real gross domestic product (GDP) fell by 11.5% year-on-year in Q3 2020 following a 16.9-percent contraction Q1 2020. This brought the year-to-date GDP to a 9.7% contraction. On the demand side, household consumption and investment improved with the partial reopening of the economy, although government spending eased. On the supply side, the agriculture sector expanded slightly, while output in the services and industry sectors declined at slower rates.

High frequency indicators also continued to indicate subdued demand. The composite Purchasing Managers’ Index (PMI) for November 2020 remained below the 50-point expansion threshold. Capacity utilization also continued to be below optimal, while the volume and value of production orders in the manufacturing sector remained tepid. Fewer sales of new vehicles, a decline in property prices amid elevated vacancy rates, and lower energy consumption also pointed to weak demand conditions. Nevertheless, business confidence improved, and consumer expectations were less pessimistic in Q4 2020.

 

Global economic activity shows signs of modest growth. Real GDP in the US, euro area, Japan, and India showed single-digit contractions in Q3 2020, an improvement from their double-digit declines in the previous quarter. Latest PMIs in these countries also reflected general optimism. Economic activity in China expanded during Q3 2020, indicating a sustained recovery from the pandemic.

The domestic financial system continues to be stable amid ample liquidity. Demand for Treasury papers remained robust on the back of sustained market interest for safe assets and ample liquidity in the financial system. The peso also appreciated from the previous quarter, reflecting in part the country’s high level of international reserves as well as positive market sentiment over the progress in the development of vaccines against COVID-19. The Philippine Stock Exchange Index improved during Q4 2020 relative to the previous quarter due to favorable market sentiment.

Meanwhile, in the credit market, the results of the latest senior loan officers’ survey indicated a general tightening in credit standards during the quarter. It should be noted that the survey was conducted within the government’s extension of general community quarantine (GCQ) measures in Metro Manila and various areas outside the National Capital Region. Nevertheless, the Philippine banking system continued to exhibit resilience and stability in Q3 2020 as economic activities and financial transactions in the country continued to improve amid the gradual reopening of various sectors.

The BSP eased its overnight policy interest rate in Q4 2020. The BSP cut the overnight reverse repurchase (RRP) rate by 25 basis points (bps) in November and held the policy rate steady in December. The BSP’s decision to maintain its accommodative stance during the quarter was based on a benign inflation outlook for 2021 up to 2022, with inflation expectations well-anchored within the target range. The balance of risks to the inflation outlook also continued to lean toward the downside over the policy horizon due mainly to potential disruptions to domestic and global economic activity amid the ongoing pandemic.

While the resurgence of COVID-19 cases globally prompted the reimposition of preventive measures during the latter part of the quarter, optimism over the delivery of vaccines has lifted market confidence, supporting improved prospects for global growth. On the domestic front, the BSP has observed some encouraging signs of recovery amid indications of improved mobility and sentiment. Meanwhile, possible upside surprises to inflation may be linked to supply-side risks such as weather disturbances and rising global crude oil prices.

Given these considerations, the BSP is of the view that prevailing monetary policy settings remain accommodative to help quicken the economy’s transition toward a sustainable recovery. Continuing monetary policy support, together with sustained fiscal initiatives to ensure public welfare, should help mitigate strong headwinds to growth.

Looking ahead, the BSP remains committed to deploying its full range of monetary instruments and regulatory relief measures as needed in fulfillment of its mandate to promote non-inflationary and sustainable growth over the long term.