INFLATION eased significantly in the first quarter of the year, supported by generally stable prices of major food items, the strengthening of the peso and the subsiding base effects of the Reformed Value Added Tax (RVAT) on the consumer price index.
At the same time, demand-based price pressures have remained moderate given the modest pace of improvement in overall demand conditions.
Domestic interest rates sustained their downtrend during the quarter, while the peso continued to strengthen against the dollar.
Alongside improving economic prospects, the current liquidity growth contributed to lower domestic interest rates.
Meanwhile, the peso has continued to draw strength from the surge in foreign exchange inflows and the country’s solid macroeconomic fundamentals.
The global economic momentum continued with a gradual rebalancing in the composition of global growth.
The pace of growth in Japan and emerging Asia continued to pick up while the economic expansion in the Euro Area strengthened significantly.
Likewise, the US eco-nomy has continued to expand despite the cooling in the housing sector. Against this backdrop, major central banks opted to keep their policy settings steady.
The Monetary Board kept the Bangko Sentral ng Pilipinas’ (BSP) policy interest rates unchanged in the first quarter.
The Monetary Board was of the view that there were sufficient grounds for caution in the monetary stance.
Latest inflation profiles suggested a benign inflation environment for the rest of the year, while reduced supply-side pressures and moderate improvements in demand conditions contributed to the abatement of underlying price pressures.
Declining
Baseline forecasts by the BSP show a declining inflation profile.
In the absence of further adverse shocks, emerging estimates for 2007 indicate that average inflation may fall below the four to five percent target range.
Meanwhile, the 2008 average inflation is likely to settle at the low-end of the four percent.
However, monetary authorities believed that, on balance, risks to the inflation outlook remain.
A sustained surge in liquidity could generate inflationary pressures over the medium term as foreign exchange inflows are expected to remain strong.
Vulnerable
At the same time, oil prices continue to be vulnerable to geopolitical disruptions and limited production capacity.
The setting of the monetary policy stance will involve continued careful monitoring of the risks to future inflation, particularly those coming from strong liquidity growth over the medium term.
In addition, in a preemptive move to address potential inflation risks, the Monetary Board approved last week new monetary measures to strengthen the central bank’s ability to absorb excess liquidity. (PR)
