Weather, oil supply kept 2016 inflation below target – BSP

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THE weather and an oversupply of oil in world markets were behind the full-year inflation rate that fell short of the target in 2016, the central bank said in an open letter to President Rodrigo Duterte.

“Pursuant to Resolution No. 2002-01 of the Development Budget and Coordination Committee (DBCC), we issue this open letter to the President and the Filipino people to explain why the 2016 average inflation of 1.8 percent was lower than the National Government’s (NG’s) target range of 3 ± 1 percent for the year,” the Bangko Sentral ng Pilipinas (BSP) said in the letter dated January 20.

According to the BSP, inflation started to show an upward path in 2016, in line with the government’s medium-term expectations and the BSP’s projections.

The impact of El Niño and seasonal typhoons on the supply of meat and vegetables contributed to the uptick in food inflation toward the letter part of the year, it said.


“Nonetheless, the supply of food commodities, including rice, remained generally adequate and reined in further increases in food prices,” it added.

The central bank noted the oversupply of oil continued to temper international crude prices and exerted downward pressures on domestic pump prices, transport fares and electricity rates.

While international crude prices rebounded in late 2016, following plans of production cutbacks among major oil-producing countries, the increase in prices was not enough to offset the substantial decline in 2015, it said.
“Together, these factors contributed to the slight acceleration in headline inflation, although the full-year average was still below the inflation target for 2016,” it said.

As a result, the Monetary Board decided to maintain its policy settings in 2016 even if inflation stayed below the national government’s inflation target.

“In its communications to the public, the BSP made it clear that domestic price movements in 2016 continued to be driven mainly by transitory supply-side factors that were outside the influence of monetary policy. Moreover, the BSP’s inflation forecasts during the year showed inflation returning to the target by 2017,” the central bank said.

At the same time, it observed that expectations of the public on future inflation remained aligned with the official inflation target over the 2017-2018 policy horizon. While global economic conditions remained subdued, domestic economic growth remained firm and hardly requiring additional monetary stimulus owing to robust private household consumption and investment.

Business and consumer sentiment also stayed buoyant in 2016. Robust domestic activity is in turn supported by ample domestic liquidity (M3) and credit activity, with M3 growing by 12.7 percent year-on-year as of November 2016, it added.

“These considerations supported the BSP’s decision to keep its monetary policy settings steady during the year,” the central bank.

Its latest baseline forecasts continue to indicate that inflation is likely to return gradually to a path consistent with the inflation target in 2017-2018.

“We expect inflation to continue gathering pace in the year ahead, with international oil prices seen to increase as a result of recent agreements by producers to reduce output. Looking ahead, we also expect the Philippine economy to be able to absorb external shocks and sustain its growth trajectory. Firm domestic demand conditions and ongoing reforms, including on the fiscal front, continue to provide solid footing for steady expansion,” it said.

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