Inflation Averages 4.5 Percent in Q1 2021

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The BSP releases the quarterly BSP Inflation Report covering the period January-March 2021. The full text of the report is being released in PDF format on the BSP website (https://www.bsp.gov.ph/SitePages/MediaAndResearch/Inflation%20Report.aspx). 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 decisions on monetary policy.

The following are the highlights of the Q1 2021 BSP Inflation Report:

• Average headline inflation rises in Q1 2021. Year-on-year (y-o-y) headline inflation increased to an average of 4.5 percent in Q1 2021 from the quarter- and year-ago rates of 3.1 percent and 2.7 percent, respectively. The average Q1 2021 inflation was also higher than the National Government's (NG) 2-4 percent target range for the year. Food inflation, arising mainly from supply-side shocks, drove overall inflation higher during the quarter. Non-food inflation also increased due largely to higher transport prices. Meanwhile, core inflation also rose to 3.5 percent in Q1 2021 from 3.2 percent in the previous quarter. However, preliminary estimates of alternative core inflation measures computed by the BSP exhibited mixed trends.

The BSP's survey of inflation expectations of private sector economists as of March 2021 indicates a higher mean inflation forecast for 2021 and an unchanged mean inflation forecast for 2022 relative to the December 2020 survey. Analysts expect inflation to remain elevated in the near term, with risks to the inflation outlook tilted to the upside owing mainly to persistent food supply disruptions, rising global crude oil prices, as well as to higher government spending, expected normalization of business operations, and continued rollout of vaccines. Nonetheless, analysts expect the BSP to keep its accommodative stance to provide support to the economy's recovery. Meanwhile, downside risks to inflation are seen to emanate from subdued domestic demand. The implementation of the 60-day price ceiling and importation of selected pork and chicken products, as well as the mobilization of domestic meat supply from the provinces to the National Capital Region (NCR), are also anticipated to help relieve price pressures.

• The domestic economy records a smaller contraction in Q4 2020. Real gross domestic product (GDP) fell by 8.3 percent year-on-year in Q4 2020 following an 11.6-percent (revised) contraction in Q3 2020. This brought full-year output to a 9.6-percent (revised) contraction in 2021, consistent with the NG's projections. On the production side, the decline in Q4 2020 was attributed to smaller output contractions in the industry and services sectors due to the further reopening of the economy. On the expenditure side, private consumption remained weak but showed some signs of improvement. Similarly, investments and external demand posed slower contractions relative to Q3 2020, while government consumption expanded.
  
  High frequency real indicators showed mixed trends, with evidence of demand recovery in some subsectors. Property prices in the main business districts in NCR continued to fall while that in areas outside NCR saw an increase. New vehicle sales and energy sales to residential and industrial sectors improved. The manufacturing Purchasing Managers' Index (PMI) remained in expansion territory in February 2021, albeit with a lower reading relative to the previous month due to weaker domestic demand. Meanwhile, the manufacturing volume of production index declined anew in January 2021. Average capacity utilization also remained below optimal as volume and value of production orders in the manufacturing sector continued to contract. Nevertheless, business sentiment became more optimistic for Q1-Q2 2021 due mainly to the reopening of the economy.
  
• Global economic activity exhibits signs of recovery. Real GDP in the US, euro area, and Japan contracted at a slower pace in Q4 2020 relative to the previous quarter. At the same time, recent PMIs in these economies indicated improvements in overall demand conditions. Meanwhile, economic activity in China continued to recover in Q4 2020.
  
  
• The domestic financial system remains healthy amid favorable credit conditions. Demand for Treasury papers remained robust amid ample financial system liquidity. The Philippine Stock Exchange Index also improved during Q1 2021 relative to the previous quarter due to favorable investor sentiment. Meanwhile, the peso depreciated from the previous quarter fueled by the renewed spike of virus infection and the continued repatriation of overseas Filipino workers.
  
  Meanwhile, in the credit market, the preliminary results of the latest senior loan officers' survey indicated a general tightening in credit standards during the quarter. It should be noted that the Q1 2021 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 in March until the first week of April. Nevertheless, the Philippine banking system continued to exhibit resilience and stability in Q1 2021 as domestic economic activities and financial transactions continued to recover from the disruption brought about by the pandemic and related quarantine measures.
  
  

• The BSP keeps its overnight policy interest rate steady in Q1 2021. The BSP maintained the interest rate at 2.0 percent for the overnight reverse repurchase or RRP facility in its meetings on 11 February and 25 March 2021. While latest projections show a higher inflation path over the policy horizon due to the impact of supply-side constraints on key food commodities as well as the continuing rise in global oil prices, inflation is still expected to return within the target band in 2022. The balance of risks to the inflation outlook remains broadly balanced around the baseline path in 2021 while leaning toward the downside in 2022. Tighter domestic food supply could lend further upside pressures on inflation, while the pandemic continues to pose downside risks to demand conditions and the inflation outlook.
  
  The BSP is of the view that the transitory uptick in inflation need not necessarily trigger an immediate tightening of the monetary policy stance. In this regard, timely and targeted non-monetary interventions must continue to be implemented to mitigate the impact of supply-side pressures on inflation. The BSP will remain watchful for any signs of inflation becoming broader based and spilling over as second-round effects, which may necessitate a calibrated response to safeguard the public's inflation expectations.