The BSP published today the 70th issue of the quarterly BSP Inflation Report covering the period January-March 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 Q1 2019 BSP Inflation Report:

Headline inflation eases in Q1 as food supply conditions improve. Year-on-year headline inflation slowed down to 3.8 percent in Q1 2019 from 5.9 percent in Q4 2018. The headline inflation for Q1 2019 is within the National Government's (NG) target range of 3.0 percent 1.0 percentage point for the year. The lower inflation during the quarter mainly reflected the significant deceleration in food inflation amid improved supply conditions. Similarly, core inflation declined to 3.9 percent in Q1 2019 from 4.9 percent in the previous quarter. The three alternative measures of core inflation computed by the BSP were likewise lower in Q1 2019.

Moreover, inflation expectations of private sector economists for March 2019 showed that mean inflation forecasts for 2019 and 2020 were lower relative to the results in December 2018. Analysts noted that possible downside risks to inflation include the implementation of the rice tariffication law and lower global crude oil prices. On the other hand, the key upside risks to inflation were seen to emanate from adverse weather conditions such as El NiAo; volatile global oil prices and foreign exchange market; and higher electricity rates.

Domestic economy continues to expand. Real gross domestic product (GDP) expanded by 6.3 percent (revised) in Q4 2018, bringing full-year growth to 6.2 percent. While GDP growth in 2018 is lower than the revised GDP growth target of the NG at 6.5 percent to 6.9 percent for the year, the Q4 GDP growth was higher than the quarter-ago rate of 6.0 percent. The expansion in real GDP was supported by sustained double-digit growth in government spending and firm household spending. On the production side, growth was driven by the industry and services sectors, particularly the construction and retail trade and related services.

Moreover, high-frequency real sector indicators continued to point to solid economic growth prospects in the near term. The composite Purchasing Managers' Index (PMI) has remained above the 50-point expansion threshold. In addition, business and household sentiment has been more upbeat over the prospects of the economy in the next quarter and the year ahead. Meanwhile, energy sales have continued to grow, while vehicle sales contracted during the quarter.

Global economic activity shows signs of weakness. In the US, real GDP continued to expand in Q4 2018, reflecting positive contributions from personal consumption expenditures, nonresidential fixed investment, exports, private inventory investment, and federal government spending. GDP growth in Japan, China, and India softened slightly in Q4 2018, although recent indicators continued to point to stable demand conditions. Meanwhile, economic activity improved slightly in the euro area. However, risks to global growth remain skewed to the downside amid elevated trade tensions, tighter financial conditions, and policy uncertainty in advanced economies.

Domestic financial market conditions remain stable despite external headwinds. The Philippine financial system remained sound, 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 officer survey, bank lending standards for loans to both enterprises and households were broadly unchanged, indicating that banks continue to be prudent in managing risks. Despite volatility stemming from the external environment, domestic financial markets were supported by favorable investor sentiment amid a sound banking system and firm economic growth prospects.

The BSP leaves its monetary policy settings unchanged in Q1 2019. The BSP decided to maintain its policy interest rate at 4.75 percent at the February and March monetary policy meetings based on its assessment of a more manageable inflation environment. Inflation pressures have eased further, reflecting mainly the decline in food inflation amid improved supply conditions, while inflation expectations have stabilized further during the quarter. Meanwhile, the BSP observed that overall prospects for domestic activity continue to be firm, supported by a projected recovery in household spending and the sustained implementation of the government's infrastructure program.

The BSP also noted that the risks to the inflation outlook remained broadly balanced for 2019 even as further risks could emerge from prolonged El NiAo weather conditions and higher-than-expected increases in global oil and food prices. For 2020, the risks lean toward the downside amid slowdown in global economic activity.

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.

Source: Bangko Sentral ng Pilipinas (BSP)