The Bangko Sentral ng Pilipinas (BSP) released the final issue of the quarterly BSP Inflation Report covering the period October-December 2021.
Beginning in the first quarter of 2022, the Inflation Report shall be known as the BSP Monetary Policy Report (MPR), which will henceforth serve as the BSP’s flagship publication on monetary policy.
The MPR will focus on the forward-looking discussion of the BSP’s inflation forecasts as well as their implications on the stance of monetary policy.
Moreover, the publication cycle of the MPR will better synchronize with the meetings of the Monetary Board on monetary policy, thus allowing the BSP to update the public in a more timely manner on how recent developments may affect its inflation outlook.
The maiden issue of the MPR will be published on 18 February 2022, following the announcement of the BSP’s monetary policy decision on 17 February 2022.
The following are the highlights of the Q4 2021 BSP Inflation Report:
- Average headline inflation eases in Q4 2021. Year-on-year (y-o-y) headline inflation slowed down to an average of 4.2 percent in Q4 2021 from 4.5 percent in the previous quarter. This brought the year-to-date average inflation to 4.5 percent, higher than the National Government’s (NG) target range of 2-4 percent for 2021. Food inflation declined due mainly to slower price increases of key food items amid easing supply constraints. Meanwhile, non-food inflation rose owing to higher inflation in energy-related items, specifically in petroleum products and charges for electricity generation and transmission. Nevertheless, core inflation was steady at 3.2 percent in Q4 2021. Estimates of alternative core inflation measures produced by the BSP indicated manageable underlying price pressures overall even as they showed mixed trends.
- The BSP’s survey of inflation expectations of private sector economists as of December 2021 showed higher mean inflation forecasts for 2021 and 2022 and a lower mean inflation forecast for 2023 relative to the September 2021 survey. Most analysts expected the BSP to raise the policy interest rate in 2022 and 2023, with upside risks seen to emanate from normalization of business activities amid the less stringent quarantine measures; persistently high global oil prices and their possible impact on transport costs; election-related spending; supply chain disruptions; and increased government spending on infrastructure. Meanwhile, downside risks to inflation are linked to the global resurgence of COVID-19 infections, which could potentially result in the re-imposition of lockdown measures; base effects; domestic oil price rollbacks; and lower domestic food prices and ample food supply owing to non-monetary government interventions..
- The domestic economy sustains growth in Q3 2021, albeit at a slightly subdued pace. Real gross domestic product (GDP) grew by 7.1 percent y-o-y in Q3 2021, slower than the 12.0-percent (revised) growth in the previous quarter. The lower GDP growth may be attributed to the reimposition of strict mobility restrictions in August-September, as well as the adverse effects of weather disturbances on the agricultural sector. On the expenditure side, key drivers include the sustained but slower growth in household consumption and investment as well as the recovery in government spending. On the production side, the tempered expansions in the industry and service sectors supported output growth.
Other high-frequency demand indicators also continued to show signs of improvement. Residential property prices in the National Capital Region (NCR) and areas outside NCR (AONCR) rose, while property prices in Metro Manila central business districts continued to decline. Vehicle sales went up mainly on higher sales of commercial vehicles while energy sales also rose due to higher energy consumption in residential, industrial, and commercial areas. Leading indicators of economic activity also exhibited positive signals. In October 2021, average capacity utilization of the manufacturing sector rose despite the high number of establishments that operated below the 80 percent level. During the same month, the manufacturing volume and value of production indices increased. For Q4 2021, business sentiment was upbeat while consumer confidence remained weak. Nevertheless, the consumer outlook for Q1 2022 became more optimistic.
- Global economic activity expands at a slower pace. The JP Morgan Global All-Industry Output Index rose at a slightly slower pace in December relative to November, as output growth, new business, and employment moderated. Real GDP in the US, euro area, China, and India grew in Q3 2021. Recent PMI readings for these countries, as well as for Japan, remained in the expansion territory, indicating a sustained optimistic outlook. Similarly, the ASEAN PMI rose slightly amid continued improvement in demand conditions due partly to easing quarantine restrictions.
- The domestic financial system remains stable. Demand for government securities continued to be robust on the back of ample financial system liquidity. The Philippine Stock Exchange Index (PSEi) rose on investor optimism amid the decline in local COVID-19 cases, the accelerated vaccination program, and the easing of lockdown restrictions. Strong Q3 corporate earnings, faster-than-expected Q3 2021 GDP growth, as well as the BSP’s decision to keep monetary policy settings accommodative also contributed to favorable market sentiment. Meanwhile, the peso depreciated marginally amid prospects of a faster pace of tightening by the US Federal Reserve as well as inflation concerns due to the general rise in global oil prices.
The preliminary results of the latest BSP senior loan officers’ survey indicated a general tightening in credit standards in Q4 2021. Meanwhile, the diffusion index (DI) approach shows a net easing of overall credit standards for loans to households. The collection of responses to the survey coincided with the government’s extension of the COVID-19 Alert Level 2 measures in Metro Manila, a quarantine classification that allows more economic activity and has relatively fewer restrictions. At the same time, the Philippine banking system also continued to exhibit resilience and stability as banks’ balance sheets showed a sustained growth in assets and deposits. Moreover, banks’ asset quality remained manageable while capital adequacy ratios stayed above international standards.
- The BSP maintains its accommodative monetary policy stance in Q4 2021. The BSP decided to keep the interest rate for the overnight reverse repurchase (RRP) facility at 2.0 percent in its meetings on 18 November and 16 December 2021.
Latest BSP forecasts show a manageable inflation environment over the policy horizon, with average inflation projected to settle back to within the government’s 2-4 percent target range in 2022 and 2023. The risks to the inflation outlook have shifted towards the upside for 2022 but remain broadly balanced for 2023. Upside risks are attributed mainly to the potential impact of continuing constraints on the supply of key food items and petitions for transport fare hikes. Strong global demand amid lingering supply-chain bottlenecks may also exert further upward pressures on international commodity prices. Meanwhile, the emergence of new COVID-19 variants continues to pose downside risks to the outlook for growth and inflation. Nevertheless, recent indicators suggest that economic growth now stands on firmer ground, as credit activity continues to improve.
On balance, there remains enough scope for the BSP to keep a patient hand on its policy levers to support the economic recovery. At the same time, the sustained implementation of non-monetary interventions will help ensure adequate domestic food supply and thereby mitigate further supply-side pressures on inflation.
Looking ahead, the BSP affirms its support for the domestic economy while monitoring vigilantly the potential risks to future inflation. Preserving ongoing monetary policy support shall help sustain the economy’s momentum over the next few quarters, especially amid downside risks to the economic recovery. Nevertheless, the BSP stands ready to respond to potential second-round effects arising from supply-side pressures, in line with its price and financial stability objectives.
