The BSP publishes today the 69th issue of the quarterly BSP Inflation Report covering the period October-December 2018. The full text is also released in electronic format as a downloadable PDF file 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 decisions on monetary policy.

The following are the highlights of the Q4 2018 BSP Inflation Report:

Average inflation settles above the 2018 inflation target range but eases during Q4 2018. Year-on-year headline inflation moderated to an average of 5.9 percent in Q4 2018 from the quarter-ago average of 6.2 percent. This brought the full-year average inflation rate to 5.2 percent, which is above the National Government's (NG) target range of 3.0 percent 1.0 percentage point for the year. Food inflation moderated during the review quarter as supply conditions improved for key food items. Meanwhile, non-food inflation also eased in Q4 2018, as lower international oil prices exerted downward pressure on transport inflation through lower gasoline and diesel prices. By contrast, core inflation rose to 4.9 percent in Q4 2018, higher than the rates posted in the previous quarter and a year ago. Similarly, the BSP's three alternative measures for core inflation were higher during the quarter.

Domestic demand indicators point to less robust market sentiment. Real gross domestic product (GDP) expanded by 6.1 percent in Q3 2018, slower than the 6.2-percent (revised) expansion in Q2 2018 and the 7.2-percent growth recorded in Q3 2017. Although lower than the trend, the Q3 2018 GDP growth was higher the long-run average. The slowdown in the Q3 2018 GDP expansion was due to the slower growth in household consumption on the expenditure side and the decline in the agriculture, hunting, forestry and fishing and the industry sectors on the production side. Meanwhile, high-frequency indicators of domestic activity continued to present mixed signals. The composite PMI stayed firmly above the 50-point expansion threshold, pointing to sustained expansion across all sectors. Capacity utilization for the manufacturing sector showed that more than half of major manufacturing sectors operate at above 80.0 percent, while energy sales accelerated. However, vehicle sales contracted, business outlook turned less optimistic, and consumer confidence weakened during the quarter.

Global economic activity weakens. Albeit slower, real GDP in the US continued to expand in Q3 2018, reflecting positive contributions from personal consumption expenditures, private inventory investment, state and local government spending, federal government spending, and nonresidential fixed investment. In the euro area, economic activity eased due to slower growth in production and new work. Real GDP also declined in Japan, driven by the contraction in both private and public demand. Similarly, the Chinese economy posted a slower rate of GDP expansion in Q3 2018 as the government's efforts to tackle leverage risks and the trade war with the United States began to weigh on economic activity. Aggregate growth in emerging Asian economies also decreased as new orders improved only marginally while export orders declined amid weaker foreign demand.

Domestic financial system remains healthy. The domestic financial system in Q4 2018 reflected the volatility arising mainly from the external environment. The Philippine Stock Exchange index declined during the review quarter as local shares mirrored the global sell-off in November amid concerns over the fall in US stocks, rising trade tensions between the US and China, and slowing global growth. Meanwhile, the peso appreciated slightly against the US dollar due mainly to improving domestic inflation data and strong remittance inflows. Sovereign debt spreads narrowed on account of favorable market reaction over the US Fed rate hike in December. Investor demand for government securities also remained strong towards the latter part of the quarter on the back of lower inflation expectations. In addition, the banking system exhibited sustained growth in total assets and deposits, while capital adequacy ratios remained comfortably above international norms, even with the implementation of the tighter Basel III framework. Based on the latest round of the BSP survey on senior bank loan officers, bank lending standards for loans to both enterprises and households were broadly unchanged during the quarter, indicating a steady supply of credit.

The BSP raises its policy rate in November but maintains its monetary policy settings in December. The Monetary Board decided to raise the policy rate anew by 25 basis points during its monetary policy meeting on 15 November 2018, given the assessment that the balance of risks to inflation were still weighted to the upside and inflation expectations have remained elevated. The Monetary Board believed that favorable prospects for the domestic economy allowed some scope for a measured adjustment in the policy rate to rein in inflation expectations and preempt further second-round effects. The Monetary Board deemed it necessary to respond with proactive policy action to help temper the risks to the inflation outlook, including those emanating from the continued uncertainty in the external environment amid tighter global financial conditions and trade tensions among major economies.

Meanwhile, inflation momentum continued to slow down in December as both food and non-food inflation eased, giving the BSP some latitude to allow its monetary policy adjustments throughout 2018 to work their way through the economy. In deciding to maintain the BSP's monetary policy settings during the 13 December 2018 policy meeting, the Monetary Board noted that the latest inflation forecasts showed a lower path over the policy horizon, with inflation settling within the target band of 3.0 percent 1.0 percentage point for 2019-2020. Recent headline inflation readings indicated signs of receding price pressures as constraints on food supply continued to ease with the implementation of various non-monetary measures. Inflation expectations had also steadied given the decline in international crude oil prices and the stabilization of the peso.

The BSP reiterates that it remains vigilant against developments that could affect the outlook for inflation and financial stability. The BSP reassures the public of its strong commitment to take further policy action as appropriate to safeguard its price stability mandate.

Source: Bangko Sentral ng Pilipinas (BSP)