Category : Press Release
Date : October 29, 2020
Agency : Bangko Sentral ng Pilipinas
Title : Q3 2020 Inflation Remains within Target Range
Article : ?The BSP published today the 76th issue of the quarterly BSP Inflation Report covering the period July-September 2020. The full text of the report is being released in PDF format on the BSP website ( The BSP Inflation Report is being 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 Q3 2020 BSP Inflation Report:

Headline inflation remains within the target range in Q3 2020. Year-on-year (y-o-y) headline inflation settled at 2.5 percent in Q3 2020, higher than the quarter- and year-ago rates of 2.3 percent and 1.7 percent, respectively. The year-to-date inflation of 2.5 percent remained within the National Government’s (NG) inflation target range of 3.0 percent ± 1.0 percentage point (ppt) for the year. The uptick in inflation during the quarter was driven by higher inflation for non-food items, primarily transport services and domestic petroleum products, which offset the lower inflation for food items. Similarly, core inflation increased to 3.2 percent in Q3 2020 from 2.9 percent in the previous quarter. By contrast, preliminary estimates of alternative core inflation measures computed by the BSP were lower in Q3 2020.

Moreover, the BSP’s survey of inflation expectations of private sector economists as of September 2020 indicates slightly higher mean inflation forecasts over the policy horizon relative to the June 2020 survey. Analysts expect average 2020 inflation to be at the lower end of the target range, with broadly balanced risks to the inflation outlook. The key upside risks to inflation include a possible rebound in domestic demand with the gradual reopening of the economy. Meanwhile, downside risks to inflation are seen to emanate partly from the impact of prolonged lockdown restrictions as well as high unemployment resulting from the closure of businesses on demand and market sentiment.

The domestic economy contracts further in Q2 2020 amid the implementation of lockdown measures. Real gross domestic product (GDP) contracted by 16.5 percent year-on-year in Q2 2020 following a 0.7-percent contraction Q1 2020. For the first half of 2020, the economy contracted by 9.0 percent. On the demand side, household consumption and investments decreased, offsetting the increase in government spending. On the supply side, the services sector reversed to a decline while the industry sector deteriorated further.

Meanwhile, higher frequency indicators continue to point to challenging conditions in the near term. The composite Purchasing Managers’ Index (PMI) for September 2020 improved at 50.1 index points, the highest since February, and marginally above the expansion threshold. However, fewer sales of new vehicles and weaker energy consumption indicated weak demand conditions. Moreover, real estate values in central business districts eased while vacancy rates went up.

Global economic activity shows signs of recovery, but uncertainty remains high. Real GDP continued to contract across major advanced and emerging economies in Q2 2020, including the US, euro area, Japan, and India. Meanwhile, economic activity expanded in China during the same quarter. Uncertainty surrounding the global growth outlook remains high, as the COVID-19 health crisis as well as governments’ responses to address it continue to evolve and disrupt economy activity. The resurgence of cases in many jurisdictions has also dampened market sentiment.

The domestic financial system remains steady amid ample liquidity. The Philippine Stock Exchange Index improved during Q3 2020 relative to the previous quarter following the gradual easing of quarantine measures in key areas in the country. Meanwhile, auctions for Treasury bills were oversubscribed on the back of strong market interest and ample liquidity in the financial system. The peso also appreciated from the previous quarter, reflecting in part weak corporate demand for foreign exchange and the country’s high level of international reserves.

Meanwhile, the results of the latest senior loan officers’ survey indicated a general tightening in credit standards during the quarter. It should be noted that the survey coincided with the government’s implementation of general community quarantine (GCQ) measures in Metro Manila and various areas outside the National Capital Region. Nevertheless, the banking system continued to show resilience and stability in Q3 2020, as the easing of quarantine measures facilitated a recovery in financial transactions.

The BSP holds the key policy rate steady in Q3 2020. The BSP kept the policy interest rate unchanged at 2.25 percent in its August and October 2020 monetary policy meetings. The BSP’s decision to maintain the policy rate was based on the assessment that prevailing monetary policy settings were appropriate. The latest baseline inflation forecasts showed a slightly lower path within the NG’s 2-4 percent inflation target range. From 2020 until 2022, the balance of risks to the inflation outlook also continued to lean toward the downside due mainly to the risk of potential disruptions to domestic and global economic activity amid the COVID-19 health crisis. Inflation expectations remained firmly anchored within the target band.

Looking ahead, the benign inflation environment provides the BSP with ample room to keep the monetary stance sufficiently accommodative to mitigate the strong downside risks to growth. At the same time, a continued pause at this juncture will enable the cumulative 175-basis-point policy rate reduction thus far in 2020 to work its way fully through the economy.

The BSP remains committed to deploying its full range of monetary instruments and regulatory relief measures as needed in fulfillment of its mandate to promote non-inflationary and sustainable growth.

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