Inflation Eases Further in Q3 2019

The BSP published today the 72nd issue of the quarterly BSP Inflation Report covering the period July-September 2019. The full text of the report is now available in PDF format on the BSP website ( The BSP Inflation Report is 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 (MB) decisions on monetary policy.

The following are the highlights of the Q3 2019 BSP Inflation Report:

Overall headline inflation edges lower, year-to-date inflation remains within the target band in Q3 2019. Year-on-year (y-o-y) headline inflation fell to 1.7 percent in Q3 2019 from 3.0 percent in Q2 2019. This brought the year-to-date (y-t-d) average inflation to 2.8 percent y-o-y, which is within the National Government's (NG) announced target range of 3.0 percent 1.0 percentage point (ppt) for the year. Inflation continued to ease during the quarter due mainly to lower food inflation. Likewise, core inflation slowed to 2.9 percent in Q3 2019 from 3.4 percent in the previous quarter. Alternative core inflation measures computed by the BSP were also lower in Q3 2019.

Moreover, the BSP's survey of inflation expectations of private sector economists as of September 2019 showed lower mean inflation forecasts for 2019 and 2020 relative to the results in June 2019, as analysts expect inflation to remain manageable and within the Government's target range.

Expansion in domestic real sector activity moderates in Q2 2019. Real gross domestic product (GDP) grew by 5.5 percent in Q2 2019, slower than the 5.6-percent and 6.2-percent expansion in Q1 2019 and Q2 2018, respectively. On the expenditure side, Q2 2019 GDP growth was driven mainly by household consumption and exports. On the production side, GDP expansion was supported by a resilient services sector.

Nevertheless, trends in high-frequency demand indicators point to a generally positive outlook for the domestic economy. The composite Purchasing Managers' Index (PMI) remained above the 50-point expansion threshold, indicating sustained expansion in economic activity in the coming months. Similarly, energy sales and sales of new vehicles improved during the quarter. Businesses and households also have a generally positive outlook on the economy based on the latest round of the BSP's Expectations Surveys.

Outlook for global economic activity remains subdued. In the US, real GDP expanded in Q2 2019, reflecting positive contributions from personal consumption expenditures, federal government spending, and state and local government spending. Meanwhile, GDP growth in the euro area, Japan, China, and India slowed in Q2 2019. Given the more subdued outlook for global economic activity owing mainly to sustained trade tensions among major economies, a number of central banks eased their monetary policy settings during the quarter.

Domestic financial market conditions are stable. In Q3 2019, banks' balance sheets showed sustained growth in assets and deposits. Asset quality indicators also remained healthy while banks' capital adequacy ratios remained above the BSP's and Bank for International Settlements' standards. In addition, based on the latest senior loan officers' survey, bank lending standards for loans to both enterprises and households were broadly unchanged, indicating that banks continue to be prudent in managing risks. Meanwhile, the Philippine equities market rallied during the quarter, as investor sentiment was supported by the country's benign inflation outlook. Similarly, the peso strengthened amid market expectations of further interest rate cuts by the US Federal Reserve. Investor appetite for local currency government securities also remained healthy, affirmed by the continued oversubscription in the scheduled government securities auctions.

The BSP further eases monetary policy settings in Q3 2019. With the sustained downtrend in domestic inflation during the quarter, the BSP saw room to reduce the policy rate by 25 bps each on 8 August 2019 and 26 September 2019. The MB recognized the benign inflation outlook and well-anchored inflation expectations over the policy horizon, with baseline projections continuing to indicate that inflation would likely settle within the lower half of the inflation target range of 3.0 percent 1.0 percentage point in 2019-2021. The balance of risks to the inflation outlook has shifted toward the upside for 2020, while it is seen to tilt to the downside for 2021. The upside risks were seen to emanate from oil price volatility and the potential impact of the African swine fever (ASF) outbreak on domestic food prices. Meanwhile, the subdued pace of global economic activity is expected to temper the inflation outlook.

Following the cumulative 200-bp phased adjustment in the reserve requirements (RRs) in May, June, and July 2019, the MB announced on 27 September its decision to reduce the RRs for universal/commercial banks (U/KBs), thrift banks (TBs), and rural banks (RBs) by 100 bps, effective on 1 November 2019. The adjustment in the RRs is in line with the BSP's broad financial sector reform agenda to promote a more efficient financial system by reducing financial intermediation costs. The cut in the RRs will apply to the deposits and deposit substitute liabilities in local currency of banks:

Looking ahead, the BSP will continue to monitor emerging price and output developments to ensure that monetary policy settings remain consistent with price stability while being supportive of sustained non-inflationary economic growth over the medium term.

Source: Bangko Sentral ng Pilipinas (BSP)