The BSP published today the 71st issue of the quarterly BSP Inflation Report covering the period April-June 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 decisions on monetary policy.

The following are the highlights of the Q2 2019 BSP Inflation Report:

Overall headline inflation settles at the midpoint of the target band in Q2 2019. Year-on-year (y-o-y) headline inflation fell to 3.0 percent in Q2 2019 from 3.8 percent in Q1 2019. This brought the average inflation for the first half of 2019 to about 3.4 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 to the significant deceleration in food inflation amid sufficient domestic food supply. Similarly, core inflation slowed to 3.4 percent in Q2 2019 from 3.9 percent in the previous quarter. Alternative core inflation measures computed by the BSP were also lower in Q2 2019.

Moreover, the BSP's survey of inflation expectations of private sector economists as of June 2019 showed lower mean inflation forecasts for 2019 and 2020 relative to the results in March 2019. Analysts expect inflation to remain manageable and within the government's target range, with risks to the inflation outlook likely to be broadly balanced. The key upside risks to inflation are seen to emanate from the adverse effects of weather conditions on domestic food supply; volatile global crude oil prices; higher government spending on infrastructure; and the potential impact of African swine fever on local pork prices. On the other hand, possible downside risks to inflation are base effects; the continued implementation of non-monetary policy actions to increase domestic food supply and stabilize prices; and lower global commodity prices owing to weaker demand.

Domestic real sector activity moderates in Q1 2019 but is expected to pick up pace in the coming months. Real gross domestic product (GDP) expanded by 5.6 percent in Q1 2019, lower than the 6.3-percent and 6.5-percent expansion in Q4 2018 and Q1 2018, respectively. On the expenditure side, Q1 2019 GDP growth was driven mainly by household consumption, investments, and government spending. On the production side, GDP expansion was supported by a resilient services sector.

High-frequency real sector indicators show mixed signals. The composite Purchasing Managers' Index (PMI) remained above the 50-point expansion threshold, even as it decreased in May relative to the previous month. The decline in the PMI contrasted with the acceleration in energy sales and increase in sales of new vehicles during the quarter. Meanwhile, the outlook of businesses on the economy was more positive while consumer sentiment was broadly steady based on the latest round of the BSP's Expectations Surveys.

Risks to global economic growth remain tilted to the downside. In the US, real GDP expanded in Q1 2019, reflecting positive contributions from personal consumption expenditures, private inventory investment, exports, state and local government spending, and nonresidential fixed investment. Similarly, GDP growth in the euro area and Japan accelerated in Q1 2019. Meanwhile, GDP expansion was broadly unchanged in China, but slower in India. Risks to global growth remain skewed to the downside as elevated trade tensions dampen market sentiment and overall economic growth prospects.

Domestic financial market conditions remain stable. The Philippine financial system continued to support the country's medium-term economic growth and outlook as banks' balance sheets exhibited sustained growth in assets and deposits. At the same time, asset quality indicators remained healthy while capital adequacy ratios continued to be above international standards even with the implementation of the Basel III framework. 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.

The BSP eases monetary policy settings in Q2 2019. The BSP deemed it appropriate to reduce the policy interest rate by 25 basis points (bps) to 4.5 percent during the 9 May 2019 monetary policy meeting, given easing price pressures during the quarter. At that time, the BSP noted that the risks to the inflation outlook were broadly balanced for 2019 amid risks of a prolonged El NiAo episode and higher-than-expected increases in global oil prices. For 2020, the risks were seen as leaning toward the downside as weaker global economic activity could temper commodity prices pressures.

On 16 May 2019, the Monetary Board (MB) also decided to implement a phased reduction in reserve requirements on the basis of the downtrend in domestic inflation over the past few months. The MB announced a reduction in reserve requirements (RRs) by 200 basis points for universal and commercial banks. On 23 May 2019, the MB complemented the reduction with a similar phased reduction in the RRs for thrift banks and non-bank financial institutions with quasi-banking functions (NBQBs). The cut in the reserve requirement ratios would be implemented according to the following schedule:

Effectivity Date

100 basis points 31 May 2019

50 basis points 28 June 2019

50 basis points 26 July 2019

The lower ratios shall apply to all reservable liabilities, except bonds and mortgage/chattel mortgage certificates as the BSP continues to assess the impact of a reduction in the RRs on said instruments.

In addition, the MB also decided on 23 May 2019 to reduce the RRs on the demand deposits and NOW accounts of rural and cooperative banks by 100 basis points, effective on the reserve week beginning 31 May 2019. Furthermore, long-term negotiable certificates of time deposit issued by all banks and NBQBs would have reduced and uniform reserve requirement ratio of 4.0 percent.

Subsequently, at its monetary policy meeting on 20 June 2019, the MB decided to maintain the BSP's policy settings to allow prior monetary adjustments to work their way through the traditional transmission channels. The decision was based on the observation that the latest baseline inflation path had shifted lower while the public's inflation expectations had settled more firmly within the inflation target band. At the same time, the balance of risks to the inflation outlook became broadly balanced for both 2019 and 2020. Weaker global economic prospects amid a possible easing in global demand and increased trade tensions continued to temper the inflation outlook, while the potential adverse effects of a prolonged El NiAo episode remained a key upside risk to inflation.

On balance, the Monetary Board believed that the manageable inflation outlook and firm domestic growth prospects supported keeping monetary policy settings steady for the time being. A prudent pause would also allow the BSP to observe and assess the impact of prior monetary adjustments, including the phased reduction in the reserve requirements to be completed by the end of July.

Looking ahead, the BSP will continue to monitor developments affecting the inflation outlook to ensure that the monetary policy stance remains consistent with its price stability objective while being supportive of economic growth.

Source: Bangko Sentral ng Pilipinas (BSP)