The skyrocketing prices of meat, fish, and vegetables during the fourth quarter, or nearing Christmas holidays, pushed inflation for the period to an average of 3.1 percent from 1.6 percent a year ago and 2.5 percent during the previous quarter.
But the Bangko Sentral ng Pilipinas said the 2.6 percent whole year inflation rate is still within the National Government’s target rate of 3 percent ± 1 percentage 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 percent 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.
Economy contracts anew in Q3
Real gross domestic product (GDP) fell by 11.5 percent 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-percent 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 economy exhibits 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.
Stable financial system
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.
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.