Vigilant monetarY policY design For price staBilitY
The BSP remains steadfast in maintaining price and financial stability, consistent with the national government’s overarching goal of higher and more inclusive economic growth. The year-to-date (January-May 2018) average headline inflation of 4.1 percent is slightly above the high end of the target range of 3 ± 1 percentage point average inflation for 2018. This reflects mainly higher global crude oil prices as well as faster price increases for some food items and services. While inflation is expected to remain elevated in 2018 due primarily to temporary supply-side factors, it is projected to return to within the target range in 2019.
The BSP notes that risks to the inflation outlook continue to lean toward the upside, with price pressures emanating from possible adjustments in transport fares, utility rates, and wages. Accordingly, the BSP continues to be vigilant against elevated inflation expectations and their potential impact on the inflation outlook. The BSP stands ready to take immediate monetary policy action as necessary to achieve its price and financial stability objectives, even as it supports carefully coordinated efforts with other government agencies in implementing nonmonetary measures to mitigate the impact of supply-side factors on inflation and social welfare.
Meanwhile, the BSP also continues to enhance the effectiveness and appropriateness of its monetary policy toolkit in response to the challenges of a fast-evolving financial environment. With the implementation of the interest rate corridor (IRC) framework in 2016, the BSP has since been better able to manage liquidity in the financial system through the use of its auction-based facilities, as reflected in the improved alignment between the BSP’s policy rate and market interest rates.
Over the medium term, further refinements to the IRC shall also facilitate the development of the domestic capital and money markets, in line with the BSP’s broad financial market reform agenda. The use of auction-based facilities under the IRC has allowed the BSP to reduce its reliance on reserve requirements for liquidity absorption and management. Consequently, the BSP has commenced its phased and gradual reduction of reserve requirement ratios in March this year. The reduction in reserve requirement ratios is an operational adjustment that supports the BSP’s shift towards a more market-based implementation of monetary policy.
Moreover, with money market activity expected to increase over time as the scale of BSP active monetary operations expands, the resulting adjustment in money market rates will help support the price discovery process and the establishment of more accurate interest rate benchmarks. The BSP will therefore continue to review and improve the operational features of the IRC system to ensure greater flexibility and efficiency in conducting monetary operations.
Finally, the BSP continues to strengthen its macroeconomic surveillance capabilities by improving its data collection and database management processes and by enhancing its suite of analytical models in line with emerging trends in data analysis.