Inflation remains with target range in second quarter: BSP

July 27, 2020

The BSP published Monday the 75th issue of the quarterly BSP Inflation Report covering the period April-June 2020.

The full text of the report is being released in PDF format on the BSP website (http://www.bsp.gov.ph/publications/regular_inflation.asp).

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:

Headline inflation remains within the target range in Q2 2020. 

Year-on-year (y-o-y) headline inflation settled at 2.3 percent in Q2 2020, lower than the quarter- and year-ago rates of 2.7 percent and 3.0 percent, respectively. This brought the average inflation for the first half of 2020 to 2.5 percent, which is within the National Government’s (NG) inflation target range of 3.0 percent ± 1.0 percentage point (ppt) for the year. Inflation eased during the quarter due mainly to the significant fall in global oil prices. Similarly, core inflation slowed to 2.9 percent in Q2 2020 from 3.2 percent in the previous quarter. Alternative core inflation measures computed by the BSP were also lower in Q2 2020.

The BSP’s survey of inflation expectations of private sector economists as of June 2020 indicates lower mean inflation forecasts over the policy horizon relative to the March 2020 survey.

Analysts expect 2020 inflation to be at the lower end of the target range, with risks to the outlook leaning towards the upside with the anticipated recovery following the relaxation of quarantine measures. Nevertheless, a key downside risk to the analysts’ inflation outlook is the subdued domestic demand given high unemployment resulting from the closure of businesses.

1. The domestic economy contracts in Q1 2020 due to lower production and weaker demand amid the COVID-19 pandemic. Real gross domestic product (GDP) contracted by 0.2 percent in Q1 2020 from a 6.7-percent and 5.7-percent expansion in Q4 2019 and Q1 2019, respectively. On the demand side, household spending was nearly unchanged while investment declined. On the supply side, the service sector slowed down while the other production sectors of the economy contracted.

Higher frequency indicators also suggested a weakening in domestic demand.

The preliminary composite Purchasing Managers’ Index (PMI) for June 2020 was below the expansion threshold, although the results of the survey also pointed to some degree of improvement as more businesses re-opened following the gradual easing of lockdown and quarantine measures in most parts of the country.

Real estate prices showed modest increases, even as a slowdown in leasing activities for office spaces had been noted. Meanwhile, new vehicles sales and energy usage declined notably.

2. Risks to global economic growth continue to lean toward the downside. Real GDP contracted across major advanced and emerging economies in Q1 2020, including the US, euro area, Japan, and China. Meanwhile, economic activity expanded at a slower pace in India. While there remains considerable uncertainty around the evolution of the COVID-19 pandemic, the risks to global growth continue to lean toward the downside. Cross-country spillovers due to persistently weak external demand and tighter financial conditions could heighten the impact of shocks to global economic activity.

3. The domestic financial system remains steady amid elevated uncertainty. The Philippine Stock Exchange Index declined during Q2 2020 relative to the previous quarter amid market volatility due to expectations of the negative economic impact of the COVID-19 pandemic. Meanwhile, the results of the latest senior loan officers’ survey showed that most of the respondent banks tightened their overall credit standards for loans to both enterprises and households.

Nevertheless, the decisive policy actions of the BSP in Q2 2020 to ease monetary conditions and enhance liquidity helped restore investor confidence. The peso appreciated from the previous quarter, reflecting optimism on the country’s response to the pandemic.

At the same time, banks’ assets and deposits continued to grow while capital adequacy ratios remained above prescribed standards.

The BSP reduced the key policy rate by 100 bps in Q2 2020. 

The BSP cut its key policy interest rate by 50 basis points (bps) in an off-cycle meeting in April. A follow-through interest rate cut of another 50 bps was decided in the scheduled June policy meeting. In deciding to reduce the key policy interest rate in Q2 2020, the BSP considered that the benign inflation environment allowed the BSP to maintain an accommodative stance to mitigate the impact of the COVID-19 pandemic on the Philippine economy. For 2020 up to 2022, authorities viewed the overall balance of risks to growth as leaning toward the downside due mainly to the potential impact of a deeper and more disruptive pandemic and global demand conditions.

The continued stabilization of domestic liquidity conditions and the improvement in market sentiment has allowed BSP to gradually reconfigure its monetary operations. Beginning in June, the BSP has reopened the other tenors of the TDF and has rescaled its daily RRP offerings. These operational adjustments will reinforce prior liquidity-enhancing measures and facilitate their transmission to market interest rates, loan growth, and eventually to overall economic activity.

 Going forward, the BSP will continue to monitor evolving economic and financial conditions to ensure that monetary policy remains in line with its mandate to preserve price and financial stability conducive to a balanced and sustainable growth of the economy. 

The BSP remains committed to use its full range of monetary instruments and to deploy regulatory relief measures as needed, in support of the National Government’s broader efforts to facilitate economic recovery.