Inflation Continues to Ease in Q4 2019

The BSP published today the 73rd issue of the quarterly BSP Inflation Report covering the period October-December 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 Q4 2019 BSP Inflation Report:

Year-to-date inflation settles well within the target range in Q4 2019. Year-on-year (y-o-y) headline inflation eased to 1.6 percent in Q4 2019 from 1.7 percent in Q3 2019. This brought the year-to-date (y-t-d) average inflation to 2.5 percent y-o-y, well within the National Government's (NG) announced target range of 3.0 percent 1.0 percentage point (ppt) for the year. Inflation slowed down slightly during the quarter due mainly to lower food and non-food inflation. Likewise, core inflation slowed to 2.7 percent in Q4 2019 from 2.9 percent in the previous quarter. Two of the three alternative core inflation measures computed by the BSP also eased in Q4 2019 relative to Q3 2019.

Moreover, the BSP's survey of inflation expectations of private sector economists as of December 2019 showed lower mean inflation forecast for 2019 and 2020 relative to the results in September 2019 as analysts expect manageable and within-target inflation over the policy horizon.

Growth in domestic real sector activity accelerates in Q4 2019. Real gross domestic product (GDP) grew by 6.4 percent in Q4 2019, faster than the revised 6.0-percent expansion in Q3 2019. The latest GDP growth figure brought the full-year 2019 average GDP growth to 5.9 percent. On the expenditure side, Q4 2019 GDP growth was supported primarily by the catch-up spending of the government and robust household consumption. On the production side, GDP growth was supported by a resilient services sector.

Meanwhile, 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 in November, indicating sustained expansion in economic activity in the coming months. Moreover, energy sales and sales of new vehicles also improved. Businesses and households also have a generally favorable outlook on the economy for Q4 2019 and Q1 2020 based on the latest round of the BSP's Expectations Surveys.

Global economic activity recovers during the quarter. In the US, real GDP expanded in Q3 2019, reflecting positive contributions from personal consumption expenditures, federal government spending, residential investment, exports, and state and local government spending. Meanwhile, GDP growth was unchanged in the euro area, but moderated in Japan, China, and India in Q3 2019. Several central banks decided to ease their monetary policy settings in Q4 2019 to provide support to their respective economies amid broadly benign inflation conditions.

Domestic financial market conditions are stable. In Q4 2019, banks' balance sheets showed sustained growth in assets and deposits, while 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. While the Philippine equities market eased slightly during the quarter, the decline was tempered by favorable domestic developments. At the same time, the peso appreciated during Q4 2019, buoyed by market's expectations of a US Fed rate cut. Investor appetite for local currency government securities also remained healthy with oversubscriptions in the Bureau of the Treasury's scheduled auctions. The upbeat investor sentiment was also reflected in the generally narrower bond spreads and lower CDS.

The BSP maintains monetary policy settings in Q4 2019. With a benign inflation environment during the quarter and well-anchored inflation expectations over the policy horizon, the BSP decided to maintain its key policy rate at 4.0 percent. Latest baseline forecasts indicate that the future inflation path remains within the target range of 3.0 1.0 percentage point in 2020-2021.

The balance of risks to the inflation outlook continues to lean slightly toward the upside in 2020 and toward the downside in 2021. Upside risks to inflation over the near term emanate mainly from potential volatility in international oil prices as well as from the potential impact of the African Swine Fever outbreak and recent weather disturbances and natural hazards on domestic food prices. However, the subdued pace of global economic activity amid trade policy uncertainty and increased geopolitical tensions could temper upward pressure on commodity prices.

Meanwhile, on 27 September 2019, the Monetary Board (MB) decided to reduce the reserve requirements for universal/commercial banks (U/KBs), thrift banks (TBs), and rural banks (RBs) by 100 basis points (bps), effective on the first reserve week of November 2019. Similarly, on 24 October 2019, the MB announced a further reduction in the reserve requirements by 100 bps for U/KBs, TBs, and by 200 bps for non-bank financial institutions with quasi-banking functions (NBQBs), effective on the first reserve week of December 2019. The prevailing RR ratios on deposits and deposit substitutes in local currency are as follows:

Source: Bangko Sentral ng Pilipinas (BSP)