MPSS Form No. 03-012 * Version 0 * 06 March 2015 File/Ref. No. MPRG-072115-04

i

FOREWORD

he primary objective of monetary policy is to promote a low and stable rate of inflation conducive to a balanced and sustainable economic growth. The

adoption in January 2002 of the inflation targeting framework for monetary policy was aimed at helping to fulfill this objective.

One of the key features of inflation targeting is greater transparency, which means greater disclosure and communication by the BSP of its policy actions and decisions. This Inflation Report is published by the BSP as part of its transparency mechanisms under inflation targeting. The objectives of this Inflation Report are: (i) to identify the risks to price stability and discuss their implications for monetary policy; and (ii) to document the economic analysis behind the formulation of monetary policy and convey to the public the overall thinking behind the BSP’s decisions on monetary policy. The broad aim is to make monetary policy easier for the public to understand and enable them to better monitor the BSP’s commitment to the inflation target, thereby helping both in anchoring inflation expectations and encouraging informed debate on monetary policy issues.

The government’s target for annual headline inflation under the inflation

targeting framework has been lowered to 3.0 percent ± 1.0 percentage point (ppt) for 2015-2018 by the Development Budget Coordination Committee (DBCC). This is consistent with the desired disinflation path over the medium term, favorable trends in the structure of inflation, and expected higher capacity of the economy for growth under a low inflation environment.

The report is published on a quarterly basis, presenting a survey of the

various factors affecting inflation. These include recent price and cost developments, inflation expectations, prospects for aggregate demand and output, labor market conditions, monetary and financial market conditions, fiscal developments, and the international environment. A section is devoted to a discussion of monetary policy developments in the most recent quarter, as well as a comprehensive analysis of the BSP’s view of the inflation outlook for the policy horizon.

The Monetary Board approved this Inflation Report at its meeting on

16 July 2015.

AMANDO M. TETANGCO, JR. Governor

23 July 2015

T

ii

List of Acronyms, Abbreviations, and Symbols ABT AL

Alcoholic Beverages and Tobacco Auto Loans

BES BGC BIR

Business Expectations Survey Bonifacio Global City Bureau of Internal Revenue

BOC Bureau of Customs BTr Bureau of the Treasury CAMPI Chamber of Automotive Manufacturers of the Philippines, Inc. CAR Capital Adequacy Ratio CBD Central Business District CES Consumer Expectations Survey CDS Credit Default Swaps CI COV

Confidence Index Coefficient of Variation

CPI DBCC DOE DI DOF EIA

Consumer Price Index Development Budget Coordination Committee Department of Energy Diffusion Index Department of Finance US Energy Information Administration

EM Emerging Market EMBI ERC

JP Morgan Emerging Market Bond Index Energy Regulatory Commission

FAO FCDA

Food and Agriculture Organization Foreign Currency Differential Adjustment

GDP Gross Domestic Product GNI GOUR

Gross National Income Generation over/under-recovery

GS Government Securities IEA International Energy Agency IMF International Monetary Fund IPP IRI

Independent Power Producer International Research Institute for Climate and Society

LFS Labor Force Survey LPG LSOUR

Liquefied Petroleum Gas Lifeline subsidy over/under recovery

LTFRB MB

Land Transportation Franchising and Regulatory Board Monetary Board

MEM MENA

Multi-Equation Model Middle East and North Africa

Meralco Manila Electric Company MISSI Monthly Integrated Survey of Selected Industries MTP NBQBs

Major Trading Partner Non-Bank Financial Institutions with Quasi-Banking Functions

NDA NEDA

Net Domestic Assets National Economic and Development Authority

iii

NEER Nominal Effective Exchange Rate NFA Net Foreign Assets; National Food Authority NG NGCP NOAA

National Government National Grid Corporation of the Philippines National Oceanic and Atmospheric Administration

NPC National Power Corporation NPI Net Primary Income NPLs Non-performing loans O&O Offshoring and Outsourcing OECD Organization for Economic Cooperation and Development OPEC OF

Organization of the Petroleum Exporting Countries Overseas Filipinos

PBR PMI PSA PSALM

Performance-Based Rate Purchasing Managers’ Index Philippine Statistics Authority; Power Supply Agreement Power Sector Assets and Liabilities Management Corporation

PSEi Philippine Stock Exchange Composite Index RB RDA

Rural Banks Reserve Deposit Account

REER Real Effective Exchange Rate ROP Republic of the Philippines RP RR

Repurchase Reserve Requirement

RREL Residential and Real Estate Loans RRP RWAs

Reverse Repurchase Risk Weighted Assets

SDA SEM SLOUR SMEs SOFSM

Special Deposit Account Single-Equation Model System loss over/under-recovery Small and Medium Enterprises Society of Fellows in Supply Management, Inc.

TLP TOUR

Total Loan Portfolio Transmission over/under-recovery

U/KBs VAPI VOPI

Universal/commercial banks Value of production index Volume of production index

WEO WESM

World Economic Outlook Wholesale Electricity Spot Market

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THE MONETARY POLICY OF THE BANGKO SENTRAL NG PILIPINAS

The BSP Mandate The BSP’s main responsibility is to formulate and implement policy in the areas of money, banking and credit, with the primary objective of maintaining stable prices conducive to a balanced and sustainable economic growth in the Philippines. The BSP also aims to promote and preserve monetary stability and the convertibility of the national currency. Monetary Policy Instruments The BSP’s primary monetary policy instrument is its overnight reverse repurchase (RRP) or borrowing rate. Other instruments to implement the desired monetary policy stance to achieve the inflation target include (a) increasing/decreasing the reserve requirement; (b) encouraging/discouraging deposits in the special deposit account (SDA) facility by banks and trust entities of BSP-supervised financial institutions; (c) adjusting the rediscount rate on loans extended to banking institutions on a short-term basis against eligible collateral of banks’ borrowers; and (d) outright sales/purchases of the BSP’s holdings of government securities. Policy Target The BSP’s target for monetary policy uses the Consumer Price Index (CPI) or headline inflation rate, which is compiled and released to the public by the National Statistics Office (NSO). The policy target is set by the Development Budget Coordination Committee (DBCC)1 in consultation with the BSP. The inflation target for 2015-2018 is 3.0 percent ± 1.0 ppt.2 BSP’s Explanation Clauses These are the predefined set of acceptable circumstances under which an inflation-targeting central bank may fail to achieve its inflation target. These clauses reflect the fact that there are limits to the effectiveness of monetary policy and that deviations from the inflation target may sometimes occur because of factors beyond the control of the central bank. Under the inflation targeting framework of the BSP, these exemptions include inflation pressures arising from: (a) volatility in the prices of agricultural products; (b) natural calamities or events that affect a major part of the economy; (c) volatility in the prices of oil products; and (d) significant government policy changes that directly affect prices such as changes in the tax structure, incentives, and subsidies.

1 The DBCC, created under Executive Order (E.O.) No. 232 dated 14 May 1970, is an inter-agency committee tasked primarily to formulate the National Government's fiscal program. It is composed of the Office of the President (OP), Department of Budget and Management (DBM), National Economic and Development Authority (NEDA), and the Department of Finance (DOF). The BSP attends the Committee meetings as a resource agency.

2 The inflation target range for 2015-2018 was announced thru DBCC Resolution No.2015-1 dated 27 January 2015.

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The Monetary Board The powers and functions of the BSP, such as the conduct of monetary policy and the supervision over the banking system, are exercised by its Monetary Board, which has seven members appointed by the President of the Philippines. Starting in 2012, the Monetary Board will hold eight (8) monetary policy meetings in a year to review and decide on the stance of monetary policy. Prior to 2012, monetary policy meetings were held every six weeks while prior to July 2006, meetings were held every four weeks during the 2002 – July 2006 period.

Chairman Amando M. Tetangco, Jr. Members Cesar V. Purisima

Alfredo C. Antonio

Felipe M. Medalla

Armando L. Suratos

Juan D. De Zuñiga, Jr.

Valentin A. Araneta

The Advisory Committee The Advisory Committee was established as an integral part of the institutional setting for inflation targeting. It is tasked to deliberate, discuss, and make recommendations on monetary policy to the Monetary Board. Like the Monetary Board, the Committee will meet eight times a year (beginning in January 2012) but may also meet between regular meetings, whenever deemed necessary.

Chairman Amando M. Tetangco, Jr. Governor

Members Diwa C. Guinigundo

Deputy Governor Monetary Stability Sector

Nestor A. Espenilla, Jr. Deputy Governor Supervision and Examination Sector

Ma. Ramona GDT Santiago

Assistant Governor Treasury Department

Francisco G. Dakila, Jr. Managing Director Monetary Policy Sub-sector

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2015 SCHEDULE OF MONETARY POLICY MEETINGS, INFLATION REPORT PRESS CONFERENCE AND PUBLICATION OF MB HIGHLIGHTS

Period Advisory

Committee (AC) Meeting

Monetary Board (MB)

Meeting

MB Highlights Publication

Inflation Report (IR) Press

Conference

2

0

1

5

Jan 8 (Thu)

(11 Dec 2014 MB meeting)

23 (Fri)

(Q4 2014 IR)

Feb 6 (Fri)

(AC Meeting No. 1)

12 (Thu)

(MB Meeting No. 1)

Mar 20 (Fri)

(AC Meeting No. 2)

26 (Thu)

(MB Meeting No. 2)

12 (Thu)

(12 Feb 2015 MB meeting)

Apr 23 (Thu)

(26 Mar 2015 MB meeting)

24 (Fri)

(Q1 2015 IR)

May 8 (Fri)

(AC Meeting No. 3)

14 (Thu)

(MB Meeting No. 3)

Jun 19 (Fri)

(AC Meeting No. 4)

25 (Thu)

(MB Meeting No. 4)

11 (Thu)

(14 May 2015 MB meeting)

Jul 23 (Thu)

(25 Jun 2015 MB meeting)

23 (Thu)

(Q2 2015 IR)

Aug 7 (Fri)

(AC Meeting No. 5)

13 (Thu)

(MB Meeting No. 5)

Sep 18 (Fri)

(AC Meeting No. 6)

24 (Thu)

(MB Meeting No. 6)

10 (Thu)

(13 Aug 2015 MB meeting)

Oct 22 (Thu)

(24 Sep 2015 MB meeting)

23 (Fri)

(Q3 2015 IR)

Nov 6 (Fri)

(AC Meeting No. 7)

12 (Thu)

(MB Meeting No. 7)

Dec 11 (Fri)

(AC Meeting No. 8)

17 (Thu)

(MB Meeting No. 8)

10 (Thu)

(12 Nov 2015 MB meeting)

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Contents

OVERVIEW ................................................................................................................ 5

I. INFLATION AND REAL SECTOR DEVELOPMENTS ............................................................. 7

Prices .................................................................................................................... 7

Private Sector Economists’ Inflation Forecasts .............................................. 9

Energy Prices ................................................................................................ 10

Power ........................................................................................................... 11

Aggregate Demand and Supply .......................................................................... 13

Aggregate Demand ...................................................................................... 14

Other Demand Indicators ............................................................................ 15

Aggregate Supply ......................................................................................... 24

Labor Market Conditions ................................................................................... 25

II. MONETARY AND FINANCIAL MARKET CONDITIONS...................................................... 26

Domestic Liquidity and Credit Conditions .......................................................... 26

Interest Rates ..................................................................................................... 31

Financial Market Conditions ............................................................................... 33

Banking System .................................................................................................. 36

Exchange Rate .................................................................................................... 39

III. FISCAL DEVELOPMENTS ........................................................................................ 42

IV. EXTERNAL DEVELOPMENTS .................................................................................... 43

V. MONETARY POLICY DEVELOPMENTS ........................................................................ 48

VI. INFLATION OUTLOOK ........................................................................................... 49

BSP Inflation Forecasts ....................................................................................... 49

Risks to the Inflation Outlook ............................................................................. 53

VII. IMPLICATIONS FOR THE MONETARY POLICY STANCE .................................................... 56

SUMMARY OF MONETARY POLICY DECISIONS .................................................................. 59

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OVERVIEW Inflation eases further. Headline inflation continued to decelerate in Q2 2015, slowing down to 1.7 percent from the quarter- and year-ago rates of 2.5 percent and 4.4 percent, respectively–a record low using the 2006-based CPI series. Nevertheless, the year-to-date average inflation of 2.0 percent remains within the Government’s inflation range target of 3.0 percent ± 1.0 percentage point for 2015. Moderate price increases for most food items, due mainly to adequate supply, helped push down headline inflation. Similarly, non-food inflation eased slightly on lower prices of electricity and domestic petroleum products. Core inflation decelerated further to 2.2 percent in Q2 2015 from 2.5 percent in Q1 2015 and 3.0 percent in Q2 2014. All three alternative measures of core inflation estimated by the BSP were also lower during the review period relative to the rates registered in the previous quarter. The number of CPI items with inflation rates greater than the upper end of the 2015 inflation target meanwhile declined to 30 items in Q2 2015 from 32 items in the previous quarter. These items accounted for 14.9 percent of the CPI basket.

Inflation expectations edge near the lower end of the 2015 target band. Results of the BSP’s survey of private sector economists for June 2015 yielded lower mean inflation forecasts for 2015-2016 relative to the results in March 2015. Respondents ascribed their lower inflation expectations mainly to the decline of international food and oil prices, which are seen to offset the effects of El Niño, possible power supply shortages, the expected Fed rate hike and election-related spending. Similarly, the June 2015 Consensus Economics inflation forecast survey showed lower inflation forecast for 2015 at 2.4 percent while 2016 remained unchanged at 3.5 percent.

Domestic demand conditions remain firm. The Philippine economy expanded at a slower pace of 5.2 percent in Q1 2015, below the Government’s growth target of 7.0-8.0 percent for the year. The weaker-than-expected growth was due largely to the lower-than-programmed pace of public spending and slower export growth on the expenditure side, as well as the deceleration in manufacturing on the production side. Nonetheless, firm household consumption and resilient service sector growth continued to support the economy during the review quarter. Moreover, trends in higher-frequency demand indicators were generally positive. Vehicle sales continued to post double-digit growth on sustained consumer spending amid attractive financing packages, while the composite Purchasing Managers’ Index remained above the 50-point expansion threshold. Business expectations remained optimistic while consumer confidence weakened as the favorable macroeconomic conditions of the country were tempered by concerns on possible increases in commodity prices.

Global economic prospects improve but growth conditions continue to vary across regions. Growth in the US remains generally on track, sustained by labor market gains and upbeat consumer sentiment. Meanwhile, economic indicators for the euro area show improvement, with firm rates of expansion recorded in the core economies. In contrast, Asian economies have experienced more subdued activity, with China’s economy weighed down by the real estate sector’s downturn and Japan’s recovery still modest. The uneven pace of global growth amid soft commodity prices, including for oil, is expected to keep global inflation benign. The international price of oil is projected to remain below 2014 levels as the current oil market oversupply persists in the coming months. Domestic financial market conditions remain generally favorable. The manageable inflation environment and favorable domestic outlook continued to support a generally positive investor sentiment during the review quarter. In addition, a number of central banks decided to ease their monetary policy settings during the quarter to help support economic activity and guard against downside risks to inflation owing to the sharp decline in international oil prices. However, pockets of

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volatility were fuelled by renewed fears of a US policy rate hike and uncertainty surrounding the Greece debt crisis toward end-June. Nonetheless, domestic financial markets remained favorable owing largely to investor confidence on the country’s firm macroeconomic fundamentals. The Philippine Stock Exchange reached an average of 7,760.08 index points during the review period while investor appetite for local government securities remains healthy as evidenced by the continued oversubscription in the scheduled GS auctions. Similarly, bond spreads declined indicating continued positive sentiment on Philippine sovereign debt papers. The Philippine banking system also remained sound and resilient, marked by sustained growth in assets, lending, and deposits, and with capital adequacy ratios holding comfortably above the BSP’s and Bank for International Settlements’ prescribed levels. Bank lending standards for both loans to enterprises and household were also broadly unchanged during the quarter, indicating that banks continue to prudently manage their risks.

The BSP maintains monetary policy settings during the quarter. The BSP decided to maintain its key policy interest rates at 4.0 percent for the overnight borrowing or RRP facility and 6.0 percent for the overnight lending or RP facility. The interest rates on term RRPs, RPs, and SDAs were also kept steady. Similarly, the reserve requirement ratios were left unchanged as well. The said policy decisions were based on the assessment that the inflation environment continued to be manageable, with the risks to the inflation outlook broadly balanced and inflation expectations remaining firmly anchored following recent inflation outturns. The prevailing monetary policy settings remain appropriately calibrated. Latest forecasts suggest that inflation is likely to settle within the lower half of the target range of 3.0 percent ± 1 percentage point for 2015 and 2016. The forecasts are also supported by well-anchored inflation expectations following recent inflation outturns. Risks to the inflation outlook continue to be broadly balanced. Pending petitions for power rate adjustments and the impact of stronger-than-expected El Niño dry weather conditions on food and utility prices present upside risks to inflation. Meanwhile, slower global economic activity poses downside risk to inflation. Inflation expectations remain well-anchored while domestic economic activity continues to expand at a solid pace. Firm domestic demand is expected to continue to deliver positive impulses to the economy, underpinned by ample liquidity and sustained credit expansion. Planned increase in government spending should provide further support to economic activity. Meanwhile, monetary policy normalization in advanced economies, particularly in the US, as well as uncertainty relating to the Greek debt crisis, with its implications on the euro area economy, could be important considerations for the inflation outlook in the quarters ahead to the extent that they can influence inflation expectations and market sentiment on the domestic front. Going forward, the BSP will continue to monitor domestic and external developments to ensure that the monetary policy stance remains consistent with its price and financial stability objectives.

7

I. INFLATION AND REAL SECTOR DEVELOPMENTS

Prices Inflation eases further on lower food prices.

0

1

2

3

4

5

6

Q12011

Q2 Q3 Q4 Q12012

Q2 Q3 Q4 Q12013

Q2 Q3 Q4 Q12014

Q2 Q3 Q4 Q12015

Q2

in p

erce

nt

Quarterly Headline Inflation (2006=100)Food Non-FoodNon-Alcoholic Beverages Alcoholic Beverages and TobaccoHeadline

Q2 20151.7 pct

Core inflation is lower. Alternative Core Inflation Measures

Quarterly averages of year-on-year change

QuarterOfficial

Headline Inflation

Official Core

Inflation

Trimmed

Mean 1/

Weighted

Median 2/

Net of Volatile

Items 3/ *2012

Q1

Q2

Q3

Q4

2013

Q1

Q2

Q3

Q4

2014

Q1

Q2

Q3

Q4

2015

Q1

Q2

3.2

3.1

2.9

3.6

3.0

3.0

3.2

2.7

2.4

3.4

4.1

4.1

4.4

4.7

3.6

2.0

2.5

1.7

3.7

3.5

3.7

4.1

3.4

2.9

3.8

2.9

2.1

2.9

3.0

3.0

3.0

3.3

2.7

2.3

2.5

2.2

3.2

3.0

3.1

3.4

3.2

2.5

3.0

2.3

2.1

2.6

3.5

3.3

3.6

3.8

3.3

2.6

3.0

2.1

3.0

2.6

3.2

3.2

3.0

2.3

2.8

2.3

2.0

2.2

2.9

2.6

3.2

3.1

2.7

2.6

3.0

2.2

3.4

3.0

3.3

3.9

3.4

3.1

3.9

3.2

2.4

2.9

2.7

2.8

2.6

2.8

2.4

2.1

2.3

1.91/ The trimmed mean represents the average inflation rate of the (weighted) middle 70 percent in a lowest

to-highest ranking of year-on-year inflation rates for all CPI components.

2/ The weighted median represents the middle inflation rate (corresponding to a cumulative CPI weight of 50 percent) in a lowest-to-highest ranking of year-on-year inflation rates.

3/ The net of volatile items method excludes the following items: bread and cereals, meat, fish, fruit, vegetables, gas, solid fuels, fuels and lubricants for personal transport equipment, and passenger transport by road, which represents 39.0 percent of all items.

r/ Revised.

* The series has been recomputed using a new methodology that is aligned with PSA’s method of

computing the official core inflation, which re-weights remaining items to comprise 100 percent of the core basket after excluding non-core items. The previous methodology retained the weights of volatile items in the CPI basket while keeping their indices constant at 100.0 from month to month.

Source: PSA, BSP estimates

0

10

20

30

40

50

60

70

0

5

10

15

20

25

30

35

40

45

Q12011

Q2 Q3 Q4 Q12012

Q2 Q3 Q4 Q12013

Q2 Q3 Q4 Q12014

Q2 Q3 Q4 Q12015

Q2

CPI Items with Inflation Rates Above Threshold

Cumulative weight in % (LHS)

No. of Items Above Threshold (RHS):4% (2015); 5% (2009-2014)

30 items

Source: Philippine Statistics Authority, BSP staff estimates

Wei

ght

in p

erce

nt

Nu

mb

er o

f it

ems

Headline and Core Inflation Headline inflation continued to decelerate in Q2 2015, slowing down to 1.7 percent from the quarter- and year-ago rates of 2.5 percent and 4.4 percent, respectively—a record low using the 2006-based CPI series. This brought the year-to-date average inflation rate to 2.0 percent, which is at the low end of the Government’s inflation range target of 3.0 percent ± 1.0 percentage point (ppt) for 2015. Moderate price increases for most food items helped push down headline inflation. Similarly, non-food inflation eased slightly on lower prices of electricity and domestic petroleum products.

Core inflation, which excludes certain volatile food and energy items to better capture underlying price pressures, decelerated further to 2.2 percent in Q2 2015 from 2.5 percent in Q1 2015 and 3.0 percent in Q2 2014. All alternative measures of core inflation estimated by the BSP were also lower during the review period relative to the rates registered in the previous quarter. In particular, the trimmed mean, weighted median, and net of volatile items measures edged lower to 2.1 percent, 2.2 percent, and 1.9 percent, respectively, from the quarter-ago rates of 3.0 percent, 3.0 percent, and 2.3 percent. The number of items with inflation rates greater than the threshold of 4.0 percent (the upper end of the 2015 inflation target) declined to 30 items in Q2 2015 from 32 items in the previous quarter. These items accounted for 14.9 percent of the CPI basket, lower than the quarter-ago share of 28.1 percent. Grouping the CPI basket into food and non-food components, the number of food and non-food items with inflation rates above the 4.0-percent threshold was slightly lower at 13 items and 17 items, respectively, in Q2 2015 from 14 items and 18 items in Q1 2015.

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Adequate domestic supply of key food items drives down food inflation.

Inflation Rates for Selected Food ItemsQuarterly averages in percent (2006=100)

Commodity2014 2015

Q1 Q2 Q1 Q2

Food and Non-alcoholic Beverages

5.6 6.8 4.8 3.0

Food 5.9 7.1 5.0 3.1Bread and Cereals 8.6 10.2 5.7 2.6

Rice 10.8 12.9 7.2 3.3Corn 3.7 5.9 2.4 0.2

Meat 2.7 4.0 4.2 1.3

Fish 4.1 5.4 5.1 5.3Milk, Cheese and Eggs 2.2 2.8 4.4 3.3Oils and Fats 1.3 4.9 2.7 0.9Fruit 5.2 5.5 11.4 9.6Vegetables 11.0 9.7 1.1 0.4Sugar, Jam, Honey 2.5 4.8 3.8 4.2Food Products N.E.C. 4.1 8.7 4.8 4.6

Non-alcoholic Beverages 1.7 1.5 2.1 2.2

Alcoholic Beverages and 9.6 4.0 4.0 3.8Tobacco

Source of Basic Data: PSA, BSP

Lower prices of electricity and domestic petroleum products contribute to the slowdown in non-food inflation.

Inflation Rates for Selected Non-Food ItemsQuarterly averages in percent (2006=100)

Commodity2014 2015

Q1 Q2 Q1 Q2

Non-Food 2.6 2.6 0.6 0.5

Clothing and Footwear 3.5 3.4 3.1 2.6Housing, Water, Electricity, 3.2 3.0 -1.1 -1.1

Gas and Other FuelsElectricity, Gas, and Other Fuels

5.8 5.6 -8.7 -8.2

Furnishings, Household 2.7 2.5 2.2 2.1

Equipment

Health 3.3 3.0 2.7 2.3Transport 1.1 1.3 -0.7 0.0

Operation of Personal Transport Equipment

4.2 5.6 -10.5 -8.6

Communication 0.0 0.1 -0.1 -0.1Recreation and Culture 2.5 2.0 1.1 1.1Education 4.7 4.8 5.1 4.7Restaurant and Miscellaneous 2.1 1.9 1.6 1.2

Goods and Services

Source of Basic Data: NSO, BSP

Food Inflation Food inflation continued to ease to 3.1 percent in Q2 2015 from 5.0 percent in Q1 2015 as most food commodities, particularly rice, corn, meat, milk, oils and fats, fruits, and vegetables posted slower price increases due to ample domestic supply. The continued downtrend in rice prices could be attributed in part to the summer harvest in a number of rice-producing provinces as well as the completion of delivery of additional 500 thousand metric tons (TMT) of rice imports.3

Alcoholic beverages and tobacco (ABT) inflation also slowed down to 3.8 percent in Q2 2015 from 4.0 percent in the previous quarter. Non-food Inflation Non-food inflation was slightly lower at 0.5 percent in Q2 2015 compared to 0.6 percent a quarter ago. Inflation on electricity, gas, and other fuels (-8.2 percent) and operation of personal transport equipment (-8.6 percent) continued to decline in year-on-year (y-o-y) terms resulting from lower generation charges and price reductions in domestic petroleum products, respectively.

3 As of 30 June 2015, the full volume of the 500 TMT government-to-government (G-to-G) contract awarded by the National Food Authority to Thailand and Vietnam on 3 March 2015 has arrived.

9

Private Sector Economists’ Inflation Forecasts Mean inflation forecasts for 2015-2017 are lower.

1.0

2.0

3.0

4.0

5.0

Jan Feb Mar Apr May June July Aug Sep Oct Nov Dec Jan Feb Mar Apr May June

2014 2015

2015 2016 2017 target range

BSP Private Sector Economists' Survey Mean forecast for full year, in percent

2015: 2.3

2016: 3.12017: 3.0

2016 2017

Q3 Q4 FY FY FY

1) Al-Amanah Islamic Bank 1.80 1.60 2.00 2.00 2.00

2) Asia ING 1.70 2.10 2.00 3.00 3.50

3) Banco De Oro 1.27 1.93 2.00 2.50 3.00

4) Bangkok Bank 2.50 2.75 2.50 3.50 3.00

5) Bank of Commerce 1.10 1.90 1.80 - -

6) Bank of China 2.50 2.70 2.50 3.00 3.00

7) Bank of the Philippine Islands 2.50 3.30 2.60 3.50 3.00

8) Barclays 1.90 1.70 2.00 3.00 -

9) Chinabank 2.50 2.70 2.70 3.30 3.20

10) CTBC Bank 2.30 2.50 2.50 3.00 3.00

11) Deutsche Bank - - 3.00 3.60 -

12) Eastwest Bank 1.60 1.70 1.90 2.20 2.50

13) Global Source 1.70 2.50 2.20 3.00 -

14) Korea Exchange Bank 2.80 2.80 2.80 2.90 2.90

15) Land Bank of the Phils 2.2-2.5 2.3-2.6 2.4-2.7 2.6-3.1 2.6-3.1

16) Maybank 2.50 3.00 2.70 3.25 3.50

17) Maybank-ATR KimEng 2.20 2.90 2.80 3.20 -

18) Metrobank - - 2.00 3.60 3.60

19) Multinat'l Inv. Banc 2.50 2.50 2.30 3.00 -

20) Mizuho 1.90 2.00 2.10 2.30 2.50

21) Nomura 2.60 2.50 2.50 3.20 -

22) Philippine Equity Parners 2.50 2.60 2.40 3.50 -

23) RCBC 1.1-1.4 1.8-2.4 1.8-2.0 3.2-3.7 3.0-3.5

24) Robinsons Bank 1.25-1.75 1.75-2.25 2.0-3.0 2.5-3.5 2.5-3.5

25) Security Bank 2.50 2.60 2.73 3.00 3.30

26) Standard Chartered 1.30 2.00 1.90 2.90 3.80

27) UBS 1.50 2.10 2.00 3.80 -

28) Union Bank 2.40 2.60 2.90 3.10 3.00

Median Forecast 2.3 2.5 2.5 3.0 3.0

Mean Forecast 2.0 2.4 2.3 3.1 3.0

High 2.8 3.3 3.0 3.8 3.8

Low 1.1 1.6 1.8 2.0 2.0

Number of observations 26 26 28 27 19

Government Target 3.0±1.0 3.0±1.0 3.0±1.0 3.0±1.0 3.0±1.0

Private Sector Forecasts for Inflation, June 2015Annual Percent Change

2015

0.0

10.0

20.0

30.0

40.0

50.0

60.0

70.0

80.0

90.0

100.0

<1 1.0-2.0 2.1-3.0 3.1-4.0 4.1-5.0 5.1-6.0 6.1-7.0 7.1-8.0

Probability Distribution For Analysts' Inflation Forecasts*2015-2017

2015 2016 2017

*Probability distributions were averages of those provided by 23 out of 28 respondents

(Source: BSP Survey)

Results of the BSP’s survey of private sector economists for June 2015 yielded lower mean inflation forecasts for 2015-2017 relative to the results in March 2015.4 In particular, the mean inflation forecast for 2015 was lower at 2.3 percent (from 2.7 percent in March 2015). Similarly, the average annual inflation forecasts for 2016 and 2017 declined to 3.1 percent and 3.0 percent (both from 3.3 percent), respectively. The analysts attributed their lower inflation expectations mainly to the decline of international food prices, which are likely to outweigh the effects of the El Niño phenomenon, power supply shortage, the possible Federal rate hike, and election-related spending. Based on the probability distributions of the forecasts provided by the respondents, a 60.8-percent chance is ascribed to average inflation for 2015 settling within the 2.1-3.0 percent range. Meanwhile, there is a 24.3 percent probability that average inflation for 2015 could be within 1.0-2.0 percent. Results of the June 2015 Consensus Economics inflation forecast survey for the country also showed lower inflation forecast for 2015 at 2.4 percent (from 2.7 percent in March 2015).5 The inflation forecast for 2016 was unchanged at 3.5 percent.

4 There were 28 respondents in the BSP’s survey of private sector economists in June 2015.

5 There were 18 respondents in the Consensus Economics’ survey in June 2015.

10

Q2 2015 BES results indicate that more respondents expect inflation to increase for the current and next quarter. Consumers expect inflation to remain steady over the next 12 months.

Relative to the previous survey, a higher majority of respondents in Q2 2015 expect inflation to move up in the current quarter from a diffusion index (DI) of -0.7 percent to 11.6 percent. Similarly, the number of respondents that expect inflation to increase in the next quarter (from a DI of 7.4 percent to 15.7 percent) increased. Although more respondents in the Q2 2015 BSP Consumer Expectation Survey (CES) anticipated prices to go up compared to a quarter ago, their mean inflation forecast was broadly steady at 3.7 percent (from 3.8 percent from the previous quarter), indicating that inflation is likely to remain stable in the next 12 months.

International oil prices advance in Q2 over supply concerns as US drilling activity slowed.

20

40

60

80

100

120

140

2012 2013 2014 2015 2016 2017

Pri

ce in

US

do

llars

pe

r b

arre

l

Spot and Estimated Future Prices of Dubai Crude Oil*

*Futures prices derived using Brent crude futures data.

31 March 2015

30 June 2015

Oil demand forecasts higher for 2015.

Energy Prices The average price of Dubai crude oil advanced in Q2 after declining for three consecutive quarters. Oil price rose by 18.0 percent quarter-on-quarter (q-o-q) in Q2 2015 due to declining crude stockpiles and slowing drilling activity in the US. Data from Baker Hughes showed that the number of active US oil rigs has fallen to 859 for the week ending 26 June, markedly lower than the 1,048 in end-Q1.6 Oil prices also increased during the quarter on uncertainty over the conclusion of the nuclear deal with Iran, signaling that a recovery in Iran’s oil exports could likewise be delayed. At the same time, the estimated futures prices of Dubai crude oil, which are based on movements in Brent crude oil futures, in Q2 2015 showed a higher path for 2015 to 2017 compared to the estimates in Q1 2015. In June 2015, both the US Energy Information Administration (EIA)7 and International Energy Administration (IEA)8 revised upward their global demand forecast for 2015 to increase by 1.3 million barrels per day (mmbd) and 1.4 mmbd, respectively. This was higher than the 1.0 mmbd projected by both agencies in the previous quarter. Meanwhile, the Organization of the Petroleum Exporting Countries (OPEC) global demand projections for 2015 was broadly

6 Figure based on week-ending 27 March 2015. Source: Baker Hughes rig count, www.bakerhughes.com

7 EIA, June 2015 Short-Term Energy Outlook, www.eia.doe.gov

8 IEA, June 2015 Oil Market Report, www.iea.org

11

Tracking the movement of international oil prices, domestic prices of petroleum products broadly higher.

Quarter Gasoline Kerosene Diesel LPG

2014

Q1 53.75 50.87 44.25 41.73

Q2 54.95 51.54 43.70 40.44

Q3 52.15 47.99 40.70 38.74

Q4 41.20 37.39 30.05 33.87

2015

Q1 42.60 35.59 28.85 31.19

Q2 45.90 37.49 29.65 30.18

Q-o-Q 3.30 1.90 0.80 (1.01)

Y-o-Y (9.05) (14.05) (14.05) (10.26)

Source: Department of Energy (DOE)

Domestic Retail Pump Prices (peso/liter)*End-quarter prices

* Average retail pump price for the Big Three oil

companies—Caltex, Petron, and Shell, Metro Manila prices

only.

Lower generation charges lead to decreased electricity prices.

unchanged at 1.2 mmbd relative to the March 2015 level. The bulk of the projected increase in world oil consumption over the next two years is still expected to come from non-OECD9 countries, specifically from China. In Q2 2015, the domestic prices of gasoline kerosene, and diesel increased by P3.30 per liter, P1.90 per liter, and P0.80 per liter, respectively, relative to their end-Q1 2015 levels. In contrast, the domestic price of LPG rolled back by P1.01 per liter during the quarter. On the other hand, compared to year-ago levels, domestic prices of gasoline, kerosene, diesel, and LPG prices went down by P9.05 per liter, P14.05 per liter, P14.05 per liter, and P10.26 per liter, respectively. Power Overall electricity rates went down in Q2 2015 due to lower generation costs. For Q2 2015, the average generation charge dropped by P0.17 per kilowatt hour (kWh) to P4.89 per kWh from P5.06 per kWh in Q1 2015. According to Meralco, the decline was driven mainly by the lower generation cost from all suppliers. For both months of May and June, the average costs of Independent Power Producers (IPPs) and Power Supply Agreements (PSAs) decreased due to declining cost of fuel and normal operations of power plants during the supply months. Likewise, the cost of power from the Wholesale Electricity Spot Market (WESM) in May decreased due to less occurrences of and shorter duration of power plant outages. The lower transmission charges and other bill components likewise contributed to the downward adjustments in the electricity rates during the review quarter. Meanwhile, the Energy Regulatory Commission (ERC) approved Meralco’s petition to collect under-recoveries in the generation, transmission, system loss and lifeline subsidy. This was incorporated in the June 2015 overall rates. As

9 Organization for Economic Cooperation and Development

12

MWSS implements rates adjustments for concessionaires.

per the ERC, MERALCO is directed to collect the net under-recoveries for the period June 2003 to December 2010 starting this June 2015 billing cycle until full amount has been collected. There are potential sources of upside pressures on electricity charges. Meralco has existing petitions with ERC for rate increases, which include the petition to implement the Maximum Average Price for 2012, 2013, 2014, and 2015; amended application for a rate increase in the January 2014 billing (consisting of incremental fuel costs and deferred generation cost to be collected monthly for six months); and petitions for the refund of generation over/under-recovery (GOUR), transmission over/under-recovery (TOUR), system loss over/under-recovery (SLOUR), and lifeline subsidy over/under recovery (LSOUR) for the period January-December 2011. In addition, the Power Sector Assets and Liabilities Management’s (PSALM) has several pending petitions with ERC for the recovery of True-Up Adjustments of Fuel and Purchased Power Costs (TAFPPC), Foreign Exchange Related Costs (TAFxA) and Purchased Power Costs and Foreign Exchange Related Costs by the National Power Corporation (NPC), and NPC’s Stranded Debt portion of the universal charge. Likewise, the National Grid Corporation of the Philippines (NGCP) also filed several petitions to recover connection charges and residual sub-transmission charges for 2011-2013 and the costs of repair on damages caused by force majeure events such as earthquake, flooding, landslides, and lightning incidents that struck the country in 2011-2012. Water For MWCI, the Metropolitan Waterworks and Sewerage System-Regulatory Office (MWSS-RO) released a resolution dated 8 May 2015, agreeing with the Appeals Panel’s decision to award a negative adjustment of 11.05 percent of MWCI’s 2012 average basic water charge of P25.88/cu.m.10 for the period 2013-2017. This would be implemented in five equal tranches at 2.21 percent per charging year. In effect, the all-in-water rate charge of MWCI fell by P0.85 to P33.98/cu.m in June from P34.82/cu.m. in April.

10

MWSS Board Resolution No. 2015-058-RO.

13

The annual percentage change in CPI was already considered in the computation. Meanwhile, the MWSS-RO partially awarded MWSI with the implementation of the annual percentage change in CPI. Using the CPI-adjusted 2012 Effective Rate (ER) of P31.25/cu.m. as the take-off point,11 the new basic charge is higher at P33.60/cu.m.12 The discontinuance of the Currency Exchange Rate Adjustment tempered the increase in MWSI’s water tariff. In addition, the adjustment to cover foreign exchange costs (i.e. foreign currency differential adjustment or FCDA) for Q2 reduced further the all-in-water tariff of MWCI by P0.31/cu.m. while all-in-tariff of MWSI was slightly higher by P0.01/cu.m.

Aggregate Demand and Supply Domestic economy remains firm despite soft headline GDP growth.

0

1

2

3

4

5

6

7

8

9

10

Q12011

Q2 Q3 Q4 Q12012

Q2 Q3 Q4 Q12013

Q2 Q3 Q4 Q12014

Q2 Q3 Q4 Q12015

year

-on

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r gr

ow

th in

per

cen

t

GDP and GNI (At Constant Prices)

GDP GNI

5.2 pct 4.7 pct

Source: Philippine Statistics Authority

The country’s real gross domestic product (GDP) expanded at a slower pace of 5.2 percent in Q1 2015, below the Government’s growth target of 7.0–8.0 percent for the year. The weaker-than-expected growth in Q1 2015 was due largely to the slower-than-programmed pace of public spending coupled with weaker exports growth on the expenditures side. The deceleration in manufacturing growth on the production side also contributed to the slowdown in GDP growth during the quarter. Nonetheless, GDP expansion in Q1 was supported by household consumption and capital formation on the expenditures side, which contributed 3.7 ppts and 2.6 ppts, respectively, to the output increase. Meanwhile, the services sector continued to be the main driver of growth on the production side, contributing 3.1 ppts to real GDP growth. On a seasonally-adjusted basis, q-o-q GDP growth decelerated to 0.3 percent in Q1 2015 from 2.5 percent in Q4 2014.

11

The Effective Rate (ER) as of 2012 was calculated or determined to be P30.28/cu.m. The ER adjusted by inflation (at 3.2 percent) resulted in P31.25/cu.m. This replaces the prior basic charge of P33.97/cu.m. in April.

Every 5 years, the ER will be computed for the determination of the Rebased Rate (Basic Charge). The Rebasing Adjustment (%) will then be applied on the ER. However, the rate rebasing was not done on a timely manner and was subject to arbitration. Thus, the rate adjustment for 2013 was not implemented until the Appeals Panel released its decision on the arbitration case.

12 MWSS Board Resolution No. 2015-030-RO.

14

Household consumption remains robust on improved employment conditions.

-30

-20

-10

0

10

20

30

40

50

Q12011

Q2 Q3 Q4 Q12012

Q2 Q3 Q4 Q12013

Q2 Q3 Q4 Q12014

Q2 Q3 Q4 Q12015

year

-on

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cen

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GDP-Expenditure (At Constant Prices)

HH Consumption Govt Spending Capital Formation5.4 pct 4.8 pct 11.8 pct

Source: Philippine Statistics Authority.

Economic PerformanceAt constant 2000 prices

Growth rate (in percent)

Sector 2014 2015

Q1 Q4 Q1

By expenditure item

Household consumption 6.1 5.0 5.4Government consumption 1.9 9.4 4.8Capital formation 12.8 3.0 11.8

Fixed capital formation 1.7 8.0 10.1

Exports 12.7 12.8 1.0

Imports 16.3 9.9 4.6

Source: PSA

Gross national income (GNI) eased to 4.7 percent in Q1 2015 from 5.7 percent in the previous quarter despite the improved growth in net primary income at 2.7 percent from 1.4 percent in Q4 2014.

Aggregate Demand Household consumption, which continued to account for more than the stable half of the country’s output at 69.1 percent, rose to 5.4 percent in Q1 2015 from the quarter-ago rate of 5.0 percent. The slightly higher growth in household consumption was supported by a generally low and stable inflation, and improved employment conditions during the quarter. Expenditures on food and non-alcoholic beverages (3.7 percent) along with transport (16.4 percent) were the major growth drivers on household spending, both contributing 1.5 ppts. Consumption of food and non-alcoholic beverages accounted for the largest share of household spending.

Government expenditures increased at a slower pace of 4.8 percent in Q1 2015 due to low budget execution. Nevertheless, the growth in government spending was driven by the 19.2-percent increase in disbursements for maintenance and other operating expenses primarily on social protections programs, bottom-up budgeting projects, and the country’s hosting of the Asia-Pacific Economic Cooperation meetings.13

Investments in capital formation continued to improve in Q1 2015, growing by 11.8 percent from 3.0 percent in Q4 2014 due largely to higher investments in fixed capital (10.1 percent), particularly durable equipment (14.3 percent) and private construction (14.2 percent). Capital outlays in durable equipment accelerated on the continued strong investment on road vehicles (28.3 percent), while private construction increased as developers continue to expand to various provinces amid strong demand for housing and office spaces. This increasing

13

NEDA (2015), “Statement of Sec. Balisacan on the 2015 Q1 Performance of the PH Economy” 28 June. http://www.neda.gov.ph/?p=5897

15

appetite of the private sector to invest in the medium- to long-term growth of the country is also reflected in the generally favorable and optimistic business sentiment. Meanwhile, investments in public construction contracted by 24.6 percent in Q1 2015 as the government’s infrastructure spending declined. Some of the reasons cited for the delays in government spending are the difficulties in the preparation and implementation of projects as well as procurement problems.

External trade contracted amid weak external demand, with net exports pulling down GDP growth by 1.8 ppts. Growth in total exports eased to 1.0 percent in Q1 2015 from 12.8 percent a quarter ago due largely to weaker growth in exports of goods. Exports of goods slowed down to 1.2 percent in Q1 2015 from 14.8 percent in the previous quarter owing in part to lower outward shipments of principal agricultural products such as banana and sugar as well as lower exports of electronic data processing, control instrumentation, and others. Similarly, exports of services increased at a slower pace of 0.4 percent from 5.0 percent in Q4 2014 as all services, except insurance, recorded a setback. Meanwhile, growth in total imports also decelerated to 4.6 percent in Q1 2015 from its quarter-ago rate of 9.9 percent on account of lower inward shipments of imports of goods. The growth in imports of goods was slower at 2.5 percent in Q1 2015 due mainly to the decline in imports of transport equipment (-32.5 percent). By contrast, the growth in imports of services rose to 11.9 percent from 10.3 percent in Q4 2014 on higher transportation and travel services.

Other demand indicators show mixed trends.

Other Demand Indicators

Demand indicators were generally positive during the quarter with vehicle sales posting double-digit growth and composite PMI remaining above the 50-point expansion threshold in April, indicating solid domestic demand. Moreover, outlook for business activity remains optimistic, supported by robust consumer demand and expectations of higher infrastructure-related spending. On the other hand, consumer confidence weakened as favorable macroeconomic conditions of the

16

Implied land values continue to trend higher. Office vacancy rate slightly lower amid continued strong demand for office space.

Strong take up of high-rise projects decreased residential vacancy rate in Q1 2015.

country was tempered by concerns of higher commodity prices. Property Prices

Land Values, Metro Manila

Data from Colliers International indicated that implied land values14 in the Makati CBD and Ortigas Center appreciated in Q1 2015 from quarter- and year-ago levels. Implied land values in the Makati CBD reached P443,750/sq.m. in Q1 2015, higher by 0.9 percent and 25.4 percent relative to the levels recorded in Q4 2014 and Q1 2014, respectively. Similarly, implied land values in the Ortigas Center rose by 1.9 percent q-o-q and 10.3 percent y-o-y to P161,500/sq.m. Land values in the Makati CBD were slightly above their 1997 levels in nominal terms, but only about 45.9 percent of their 1997 levels in real terms. Meanwhile, land values in the Ortigas Center were about 82.8 percent of their 1997 level in nominal terms and 36.4 percent in real terms. Vacancy Rates, Metro Manila

The office vacancy rate in the Makati CBD was broadly stable at 2.2 percent in Q1 2015 relative to quarter-ago level. The office vacancy rate in Q1 2015 was lower than 4.2 percent recorded a year ago due to continued strong office demand in the Makati CBD. Office vacancy rate as estimated by Colliers is expected to narrow further to 1.4 percent in Q1 2016. The residential vacancy rate in the Makati CBD decreased to 7.9 percent in Q1 2015 from 8.1 percent in the previous quarter. Likewise, the residential vacancy rate in Q1 2015 was lower than the year-ago level of 10.9 percent due to the strong take-up of high-rise residential projects amid limited supply. However, the delivery of new residential units within the next 12 months is expected to increase vacancy rates to 11.1 percent by Q1 2016.

14

In the absence of reported closed transactions, implied land values based on trends are used by Colliers International to monitor prices.

17

Office rental values rise further.

Residential rental values increase slightly. Capital values for office and residential buildings are higher.

Rental Values, Metro Manila15 Monthly Grade A office16 rents in the Makati CBD reached P878/sq.m. in Q1 2015, representing an increase of 3.2 percent from the previous quarter.

Similarly, monthly Grade A office rents in the Makati CBD were higher by 11.1 percent relative to Q1 2014. Office rental values for Grade A offices were above their 1997 levels in nominal terms. In real terms, office rental values were almost half of the comparable levels in 1997.

Monthly rents for luxury three-bedroom condominium units in the Makati CBD rose to P848/sq.m. in Q1 2015 or a 1.3 percent growth from the previous quarter. Likewise, monthly rents for the 3-bedroom segment were higher by 4.7 percent compared to the year-ago levels. Residential rental values for luxury three-bedroom high-rise units were above their 1997 levels in nominal terms but were only about 78.4 percent of their 1997 levels in real terms. Capital Values, Metro Manila Capital values17 for office buildings in the Makati CBD in Q1 2015 were higher in nominal terms than their quarter- and year-ago levels. Grade A office capital values in the Makati CBD rose to P102,000/sq.m., higher by 4.1 percent and by 12.3 percent compared to the quarter- and year-ago levels, respectively. Grade A office capital values were also higher than the 1997 levels in nominal terms. Nevertheless, in real terms, office capital values were about 56.4 percent of the comparable levels in 1997. Capital values for luxury residential buildings18 in Makati CBD in Q1 2015 increased from their quarter- and year-ago levels. Average prices for

15

Housing rentals account for 13.8 percent of the 2006-based CPI basket. The NSO only surveys rentals ranging from around P300-P10,000/month to compute rent inflation. However, the rental values discussed in this section pertain to high-end rented properties, which may be considered as indicators of wealth and demand.

16 Grade A refers to office space with capital values between P65,000 and P75,000/sq.m..

17 Probable price that the property would have fetched if sold on the date of the valuation. The valuation includes imputed land and building value.

18 In terms of location, luxury residential units are located within the CBD core and have quality access to/from and have superior visibility from the main avenue. Meanwhile, in terms of general finish, luxury residential units have premium presentation and maintenance.

18

three-bedroom luxury residential condominium units increased by 2.0 percent q-o-q and 7.9 percent y-o-y. Capital values for luxury residential buildings were above their 1997 levels in nominal terms. In real terms, residential capital values were about 66.4 percent of the comparable levels in 1997.

Vehicle sales continue to post double-digit growth. Total energy sales slow but remains positive.

Vehicle Sales Vehicle sales19 posted a double-digit growth in the first two months of Q2 2015. Vehicle sales grew by 17.8 percent y-o-y from a 21.8-percent

growth recorded in Q1 2015. The Chamber of Automotive Manufacturers of the Philippines, Inc. (CAMPI) attributed the continued growth in car sales to robust consumer demand that is bolstered by attractive financing schemes and introduction of new car models by industry players. Passenger car sales from CAMPI members grew by 25.6 percent y-o-y in April-May 2015, accruing to a total of 17,887 from 14,239 units sold in the same period in 2014.

Similarly, commercial vehicles, which account for 59.7 percent of total vehicle sales, expanded by 13.0 percent in the first two months of Q2 2015. Commercial vehicles sold during the quarter reached 26,511 units from 23,453 units in the same period in 2014. Energy Sales

Total energy sales of Meralco increased by 0.4 percent y-o-y in April 2015, lower compared to the 1.3-percent growth a year-ago. According to Meralco, the decline in electricity consumption was driven mainly by the decline in industrial sales, specifically in the following industries: basic metals, electrical machinery, transport equipments, fabricated metals, etc.

19

Vehicle sales data is gathered on a monthly basis by the Chamber of Automotive Manufacturers of the Philippines (CAMPI). CAMPI represents the local assemblers and manufacturers of vehicle units in the Philippine automotive industry. The following are the active members of CAMPI: (1) Asian Carmakers Corp., (2) CATS Motors, Inc., (3) Columbian Autocar Corp., (4) Honda Cars Philippines, Inc., (5) Isuzu Philippines Corp., (6) Mitsubishi Motors Philippines Corp., (7) Nissan Motor Philippines Corp., (8) Suzuki Philippines Inc., (9) Toyota Motor Philippines Corp. and (10) Universal Motors Corp.

19

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May Sep Jan2012

May Sep Jan2013

May Sep Jan2014

May Sep Jan2015

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Energy Sales(Year-on-year in percent)

Total

Residential

Commercial

Industrial

Source: Meralco, BSP calculations

0.4 pct

0.9 pct

1.8 pct

-1.8 pct

Capacity utilization in manufacturing remains above 80 percent.

81.8

82.0

82.2

82.4

82.6

82.8

83.0

83.2

83.4

83.6

83.8

Jan2011

May Sep Jan2012

May Sep Jan2013

May Sep Jan2014

May Sep Jan2015

in p

erce

nt

Monthly Average of Capacity Utilization for Manufacturing

Source: Philippine Statistics Authority

Manufacturing output slows down on lower production in major sectors.

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Mar May Jul Sep Nov Jan2014

Mar May Jul Sep Nov Jan2015

Mar

in p

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Volume and Value Indices of Manufacturing Production(Year-on-year in percent)

VaPI VoPI

Source: Philippine Statistics Authority

In April 2015, Residential Energy Sales (RSALES) and Commercial Energy Sales (CSALES) recorded slower y-o-y growth rates of 0.9 percent and 1.8 percent, respectively. Meanwhile, Industrial Energy Sales (ISALES) fell by 1.8 percent. Capacity Utilization

The average capacity utilization rate of the manufacturing sector was broadly steady at 83.2 percent in April 2015 from 83.5 percent a month ago based on the Philippine Statistics Authority’s Monthly Integrated Survey of Selected Industries (MISSI). Of the 689 respondent-establishments, 59.7 percent operated at 80.0 percent capacity, at the least, in April 2015. Based on data since 2000, manufacturing companies have been operating above the long-term average of 80.0 percent since 2010. Volume and Value of Production Preliminary results of the MISSI showed that volume of production index (VoPI) grew at a slower pace in April 2015 by 1.4 percent y-o-y from an expansion of 16.1 percent (revised) in the previous month. The sluggish growth was led by chemical products (46.2 percent), tobacco products (35.5 percent), furniture and fixtures (22.8 percent), and basic metals (22.3 percent), which offset the contraction in the production of petroleum products (-18.6 percent), miscellaneous manufactures (-15.1 percent), and food (-13.9 percent). Despite the slow growth in the volume of production of the manufacturing sector, output is seen to benefit from the recent expansion of Taiheiyo Cement Philippines, Inc. in Cebu, as well as the possibility of additional investments of several manufacturing firms here and abroad.20

20

Based on the press release of Economic and Planning Secretary Arsenio M. Balisacan as published by the National Economic Development Authority (NEDA).

20

Meanwhile, value of production index (VaPI) fell in April 2015 by 4.2 percent from a 9.7-percent growth (revised) a month ago. The slump in VaPI was driven by double-digit declines in the following sub-sectors: petroleum products (-34.6 percent), miscellaneous manufactures (-20.7 percent), wood and wood products (-12.1 percent), and food manufacturing (-12.1 percent).

Business sentiment in Q2 2015 improves for the current quarter.

Business Expectations Survey

Index 2014 2015

Q1 Q2 Q3 Q4 Q1 Q2

Business Outlook Index

Current Quarter 37.8 50.7 34.4 48.3 45.2 49.2

Next Quarter 50.8 48.9 52.9 43.1 58.2 47.3

Source: BSP

Optimism continues in the next quarter.

Business Expectations Results of the BES21 indicated a more upbeat outlook for Q2 2015 as the overall confidence index (CI) for the current quarter rose to 49.2 percent from 45.2 percent in Q1 2015. The higher CI indicates that more businesses are optimistic about the country’s economic prospects for Q2 2015 compared to the previous quarter. According to respondents, their more bullish outlook was due to the following: (a) robust consumer demand during the secondary harvest and fishing seasons, graduation and enrolment periods, and summer season given the expected influx of both local and foreign tourists; (b) expected increase in activities in the construction sector, particularly infrastructure-related government projects; (c) increase in orders and new contracts/projects leading to higher volume of production; (d) expansion of businesses and launch of new product lines; and (e) continuing confidence in the administration. Their more positive outlook was further driven by expectations of more favorable macroeconomic conditions in the country (particularly, stable inflation and low interest rates), sustained foreign investment inflows, and the steady stream of overseas Filipinos’ (OFs) remittances. The sentiment of businesses in the Philippines mirrored the buoyant business outlook in the US, Germany, Korea and Singapore but was in contrast to the less bullish views of those in UK, Hong Kong, and India. For the quarter ahead (Q3 2015), business outlook remained optimistic albeit at a lower CI

21

The Q2 2015 BES was conducted from 1 April – 13 May 2015 among 1,522 firms nationwide, drawn from the Securities and Exchange Commission’s Top 7000 Corporations in 2010 and Business World’s Top 1000 Corporations in 2013.

21

Consumer confidence weakens in Q2 2015…

Consumer Expectations Survey

Index 2014 2015

Q1 Q2 Q3 Q4 Q1 Q2

Current Quarter -18.8 -17.3 -26.3 -21.8 -10.0 -16.2

Next 3 months 5.4 0.0 -1.0 0.7 4.4 -0.4

Next 12 months 19.3 15.9 9.7 9.6 17.3 16.4

Source: BSP

…as well as for the next quarter.

of 47.3 percent from 58.2 percent in the previous survey. Respondents cited the following factors as reasons behind their less optimistic outlook: (a) interruption of regular business activities during the rainy season; (b) lower output (which leads to lower trade activities) during the planting season; (c) increased market competition with the establishment of new businesses which could hurt existing small- and medium-scale businesses; and (d) lower consumer demand as households prioritize enrolment expenses. Consumer Expectations Results of the Q2 2015 CES22 showed weak consumer sentiment as the overall CI fell to -16.2 percent from -10.0 percent in Q1 2014. The lower CI in Q2 2015 indicates that the number of households with pessimistic outlook increased and outnumbered those who think otherwise. According to respondents, their bearish outlook during the current quarter was due to the following: (a) anticipated higher prices of commodities due to increase in domestic oil prices, power rate hike and higher tuition fees, which could lead to higher household expenditures; (b) expected increase in the number of unemployed persons as new graduates enter the labor force; and (c) perceived graft and corruption in the government. Respondents also cited their concerns on the implications of the Mamasapano incident on the peace process, occurrence of calamities such as fire, typhoons and floods as well as the impact of the El Niño dry spell on agricultural output as reasons behind their weaker outlook. The sentiment of consumers in the Philippines mirrored the less favorable outlook of consumers in the Euro Area, China, Indonesia, Japan, Thailand, and the United States but was in contrast to the more optimistic views of those in Australia, South Korea, and Taiwan, as well as the steady outlook in the United Kingdom for Q2 2015. The less favorable consumer sentiment was carried over to the next quarter as the CI reverted to negative territory at -0.4 percent for Q2 2015

22

The Q2 2015 CES was conducted during the period 1-15 April 2015 covering 6,151 households, of which 48.2 percent were from the NCR while 51.8 percent were from areas outside NCR.

22

from 4.4 percent for Q1 2015. Meanwhile, consumer confidence for the next 12 months remained broadly steady at 16.4 percent from 17.3 percent in the previous quarter’s survey.

PMI remains above the 50-point expansion threshold.

40

45

50

55

60

65

70

Jan2011

May Sep Jan2012

May Sep Jan2013

May Sep Jan2014

May Sep Jan2015

diffu

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de

x

Purchasing Managers' Index

Manufacturing Retail & Wholesale Services Composite

52.2 53.7 59.9 57.1

Source: Philippine Institute of Supply Management (PISM)

Purchasing Managers’ Index23 The composite PMI remained firmly above the 50-point expansion threshold24 at 57.1 in April 2015, albeit lower than the 58.6 composite PMI in March 2015. The services sector PMI was unchanged while the PMI of the manufacturing and retail/wholesale (R/W) sectors were both lower as expected due to the fewer number of working days. Manufacturing PMI in April 2015 was lower at 52.2 from the 54.9 level registered in March 2015. Five of the twelve manufacturing sectors monitored—namely, food and beverages, fabricated metal, machinery, communication and medical equipment, and motor and transport—decreased relative to the previous month. This could be due to the fewer number of working days in April. Meanwhile, the key sub-indices of the manufacturing industry expanded at a slower pace in terms of new orders, production, and inventories from the month-ago levels. While the employment index went into contraction territory, as bigger number of respondents in April reported fewer hires, the decline in supplier deliveries index in April compared to the previous month suggests improvement on the time spent for deliveries.

Meanwhile, services PMI remained steady at 59.9 in April 2015 from a month ago. Three of six key services indicators namely, new orders, average operating costs and employment showed faster expansions while business activity, outstanding business and price charge decelerated relative to the previous month.

23

The PMI for the Philippines is compiled by the Foundation of the Society of Fellows in Supply Management, Inc. (SOFSM), the advocacy arm of PISM.

24 The actual formula used to calculate the PMI assigns weights to each common element and then multiplies them by 1.0 for improvement, 0.5 for no change, and 0 for deterioration. As a result, an index above 50 denotes economic expansion, and an index below 50 implies a contraction. PMI surveys are conducted on the last week of each month.

23

Export performance turns negative on lower shipments of non-electronic products.

Exports of GoodsGrowth rate (in percent)

Commodity Group2014 2015

Q1 Q4 Q1

Coconut products -19.2 9.0 25.9

Sugar and Products -33.0 -95.0 -74.2

Fruits and Vegetables 30.5 -2.1 -36.3

Other Agro-based products

20.4 14.3 -6.5

Forest products -30.5 9.9 -10.6

Mineral products 23.6 -1.5 19.2

Petroleum products -35.0 -25.5 -63.2

Manufactures -22.4 6.5 -0.1

Special transactions -38.9 173.0 143.8

Total Exports 6.6 5.7 -0.2

Source: PSA, BSP

Quarterly merchandise imports decline due to lower value of mineral fuels and lubricants.

Imports of GoodsGrowth rate (in percent)

Commodity Group2014 2015

Q1 Q4 Q1

Capital Goods 1.7 -9.8 10.3

Raw Materials & Intermediate Goods

23.9 21.4 2.1

Mineral Fuels & Lubricants

7.4 -17.6 -39.1

Consumer Goods 17.9 26.1 6.6

Special Transactions -15.1 -25.8 -4.0

Total Imports 13.2 4.5 -4.0

Source: PSA, BSP

The R/W PMI significantly declined to 53.7 in April 2015 from 60.5 a month ago. All the R/W tracking variables—purchases, sales revenues, employment, supplier deliveries, and inventories—expanded at a slower rate from their month-ago levels. Both the retail and wholesale sub-sectors slowed down in April, which could be attributed to sluggish activities during the Holy Week. External Demand

Exports

Export of goods in Q1 2015 fell by 0.2 percent y-o-y, a reversal of the year- and quarter-ago growth of 6.6 percent and 5.7 percent, respectively. The decline was driven mainly by weaker demand from major trading partners specifically those in Asia.25 Under commodities, the decline in exports was due primarily to the decrease in shipments of non-electronic commodities specifically, wood manufactures (-44.4 percent), bananas (-66.1 percent), processed food and beverages (-20.5 percent), petroleum (-63.2 percent), and sugar products (-74.2 percent). The contraction was slightly offset by the continued growth of electronic exports, which grew by 3.1 percent during the quarter.

Imports

Imports of goods declined by 4.0 percent y-o-y in Q1 2015 from a 4.5 percent growth in the previous quarter. The contraction in imports was due to the continued decline in inward shipments of mineral fuels and lubricants, which posted a double-digit contraction of 39.1 percent y-o-y during the quarter. Meanwhile, other commodities recorded gains namely, capital goods (10.3 percent), raw materials and intermediate goods (2.1 percent), and consumer goods (6.6 percent).

25

Exports to the following countries decreased in Q1 2015: Japan, China, Singapore, South Korea, and Thailand.

24

Services sector remains the main driver of output growth on the production side.

-4

-2

0

2

4

6

8

10

12

14

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Q2 Q3 Q4 Q12014

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year

-on

-yea

r gr

ow

th in

per

cen

t

GDP-Production (At Constant Prices)

Agriculture Industry Services1.6 pct 5.5 pct 5.6 pct

Source: Philippine Statistics Authority.

Economic PerformanceAt constant 2000 prices

Growth rate (in percent)

Sector 2014 2015

Q1 Q4 Q1By industrial originAgri, Hunting, Forestry & Fishing 0.6 4.2 1.6

Agriculture and Forestry 1.4 4.3 2.5Fishing -3.1 4.2 -2.6

Industry 5.4 9.1 5.5

Mining and quarrying 9.0 5.9 7.1Manufacturing 7.0 7.7 5.9Construction 1.0 17.9 4.5Electricity, gas and water supply 0.3 5.1 4.1

Services 6.8 5.6 5.6

Transport., Storage, & Comm. 8.2 4.5 8.6Trade 6.1 3.4 5.4Financial Intermediation 5.7 8.9 4.3Real estate, Rent, & Bus. Act. 10.2 9.7 6.4Public administration & defense 6.3 11.4 0.2Other services 4.3 1.8 5.8

Source: PSA

Aggregate Supply The services sector, which comprised 56.1 percent of GDP, maintained its growth momentum, expanding by 5.6 percent in Q1 2015. The growth of the services sector was driven by the expansion in all sub-sectors, led by transport, storage, and communication (8.6 percent), trade and repair of motor vehicles, motorcycles, personal and household goods (5.4 percent), real estate, renting and other business activities26 (6.4 percent), and other services (5.8 percent). Transport, storage, and communication accelerated on higher growth in land transport and storage services; while higher growth in wholesale and retail led the increase in trade and repair of motor vehicles, motorcycles, personal and household goods. Meanwhile, real estate, renting, and business activities grew on higher growth in real estate (15.2 percent). The growth in other services was attributed largely to higher growth in education.

The industry sector eased to 5.5 percent in Q1 2015 from 9.1 percent in Q4 2014 due mainly to slower growth in construction and manufacturing. Growth in construction decelerated to 4.5 percent, reflecting the fall in public construction. Meanwhile, manufacturing, which remained as the main driver of expansion in the industry group, slowed down to 5.9 percent in Q1 2015 from 7.7 percent in the previous quarter, resulting from slower growth in food manufactures as well as the decline in furniture and fixtures, wearing apparel, and office, accounting, and computing machinery. The agriculture, hunting, forestry and fishery (AHFF) expanded by 1.6 percent in Q1 2015, lower than its quarter-ago growth rate of 4.2 percent. The growth slowdown was attributed largely to the decline in the output of fishing (-2.6 percent), mango (-7.5 percent), sugarcane (-2.9 percent), coffee (-12.1 percent), and rubber (-21.6 percent). Fishing contracted as production of fish varieties like roundscad, tilapia, and skipjack declined.

26

Real estate, renting and other business activities sector includes business processing outsourcing (BPO).

25

Labor Market Conditions

Unemployment rate declines.

0

5

10

15

20

25

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Unemployment and Underemployment*

Unemployment Underemployment

* Excludes Region VIII

Source: Philippine Statistics Authority.

The Philippine labor market showed a relatively strong performance in April 2015 based on the preliminary results of the Labor Force Survey (LFS).27 Despite the slower employment growth during the period, the country’s unemployment and underemployment rates improved compared to the same period in 2014. Total employment grew by 1.3 percent in April 2015, slower compared to the 4.5-percent growth recorded in the same period in 2014 due to the decline in employment in the agriculture sector as well as the slower employment growth in the services and industry sectors.

Agricultural employment, which accounted for 29.3 percent of the country’s total employment, was adversely affected by El Niño weather conditions.28 Meanwhile, employment growth in the industry and services sectors were slightly pulled down by employment losses in the manufacturing subsector and weaker employment creation in the wholesale and retail trade and repair of motor vehicles and motor cycles subsectors. Nevertheless, as employment growth remained faster relative to that of the labor force, the country’s unemployment rate declined to 6.4 percent during the survey period from 7.0 percent in April 2014 with 13 out of 17 regions, including the National Capital Region, posting a decline in unemployment rate.2 Similarly, the country’s underemployment rate improved to 17.8 percent in April 2015 from 18.2 percent in the same period in 2014. ss

27

Excludes Leyte. According to the Philippine Statistics Authority, due to the large number of households displaced in Leyte by the typhoon Yolanda, a new sampling frame for the said province has to be created for it to be included in the survey.

28 NEDA (2015), “Key employment figures improve in April 2015, on track with gov’t target for the year,” 9 June. http://www.neda.gov.ph/?p=6018

26

II. MONETARY AND FINANCIAL MARKET CONDITIONS

Domestic Liquidity and Credit Conditions Domestic liquidity growth rises…

...but bank lending decelerates but remains at double-digit growth.

The growth in money supply or M3 accelerated to 9.3 percent in May 2015 from 8.7 percent in end-Q1 2015. Money supply continued to expand due mainly to the sustained demand for credit. Domestic claims increased by 9.6 percent in May, slightly slower than the 10.4-percent increase at end-Q1 2015, as bank lending decelerated. Meanwhile, net public sector credit declined at a slower pace of 3.5 percent in May compared to the 8.3-percent contraction at the end of the previous quarter.

The growth in net foreign assets (NFA) was broadly steady at 8.3 percent y-o-y in May from 8.4 percent in end-Q1 2015. The BSP’s NFA position continued to expand during the month on the back of robust foreign exchange inflows coming mainly from overseas Filipinos’ remittances and business process outsourcing receipts. The NFA of banks likewise increased as banks’ foreign assets expanded, while their foreign liabilities contracted. Banks’ foreign assets rose due mainly to the growth in their investments in marketable debt securities and deposits with other banks, while banks’ foreign liabilities decreased on account of lower placements made by foreign banks with their local branches.

As of May 2015, outstanding loans of commercial banks, net of banks’ reverse repurchase (RRP) placements with the BSP, grew by 14.5 percent y-o-y relative to the 16.1 percent and 20.1 percent growth posted at end-Q1 2015 and end-Q2 2014, respectively. The sustained expansion of bank lending was driven largely by loans to the following productive sectors: real estate, renting, and business services; manufacturing; wholesale and retail trade; electricity, gas and water; and, financial intermediation. Meanwhile, loans for household consumption grew by 20.5 percent as of May 2015, higher than the 19.8 percent and 16.0 percent growth registered in end-Q1 2015 and end-Q2 2014, respectively.

27

Most respondent banks maintain credit standards for loans to enterprises.

Credit Standards Results of the Q2 2015 Senior Bank Loan Officers’ Survey (SLOS)29 showed that most of the respondent banks maintained their credit standards for loans to both enterprises and households during the quarter based on the modal approach.30 This is the 25th consecutive quarter since Q2 2009 that the majority of banks reported broadly unchanged credit standards.

Similarly, the diffusion index (DI) approach31,32 pointed to basically unchanged overall credit standards for both enterprises and households in Q2 2015 as the number of respondent banks reporting tighter credit standards equaled the number of respondent banks reporting easier credit standards. In the previous quarter, DI-based results showed that credit standards for both corporate lending and households showed net tightening. Lending to Enterprises Most banks (93.5 percent of banks that responded to the question) indicated that credit standards for loans to enterprises were kept steady during the quarter using the modal approach. Respondent banks attributed their unchanged credit standards to their steady outlook on the domestic economy as well as specific industries, such as wholesale and retail trade, manufacturing, and utilities, among others, as well as banks’ unchanged tolerance for risk. In terms of specific credit standards, the unchanged overall credit standards for enterprises was reflected in unchanged collateral requirements

29

The survey consists of questions on loan officers’ perceptions relating to the overall credit standards of universal/commercial banks (U/KBs) in the Philippines, as well as to factors affecting the supply of and demand for loans by both enterprises and households. Survey questionnaires were sent to all commercial banks, except for one bank that requested not to be included in the survey since it does not engage in corporate and retail lending. Thirty-four (34) banks responded to the current survey representing a response rate of 97.1 percent. As of March 2015, U/KB loans accounted for about 86.2 percent of the banking system’s total outstanding loans.

30 In the modal approach, the results of the survey are analyzed by looking at the option with the highest share of responses.

31 In the diffusion index approach, a positive diffusion index (DI) for credit standards indicates that the proportion of banks that have tightened their credit standards are greater compared to those that eased (“net tightening”), whereas a negative DI for credit standards indicates that more banks have eased their credit standards compared to those that tightened (“net easing”).

32 From Q1 2010 to Q4 2012 survey rounds, the BSP used largely the DI approach in the analysis of survey results. Beginning in Q1 2013, the BSP used both the modal and DI approaches in assessing the results of the survey.

28

Q1 Q2 Q3 Q4 Q1 Q2

Tightened considerably 3.7 3.6 0.0 0.0 3.4 0.0

Tightened somewhat 0.0 3.6 3.2 3.2 13.8 3.2

Remained basically unchanged 88.9 85.7 93.5 93.5 79.3 93.5

Eased somewhat 7.4 7.1 3.2 3.2 3.4 3.2

Eased considerably 0.0 0.0 0.0 0.0 0.0 0.0

Total 100.0 100.0 100.0 100.0 100.0 100.0

Diffusion Index for Credit Standards -3.7 0.0 0.0 0.0 13.8 0.0

Number of banks responding 27.0 28.0 31.0 31.0 29.0 31.0

Note: A positive diffusion index for credit standards indicates that more banks have tightened

their credit standards compared to those that eased (“net tightening”), whereas a negative

diffusion index for credit standards indicates that more banks have eased their credit standards

compared to those that tightened (“net easing”).

2014

General Credit Standards for Loans to Enterprises (Overall)

2015

and steady use of interest rate floors. Meanwhile, a number of respondent banks also reported narrower loan margins and increased credit line sizes for all types of business loans, except micro enterprises, as well as longer loan maturities for top corporations and large middle-market enterprises. 33 By borrower firm size, overall credit standards for top corporations and large middle-market enterprises showed slight net easing based on the DI approach. Meanwhile, credit standards for small and medium enterprises (SMEs) and micro enterprises showed a slight net tightening. For the next quarter, most of the respondent banks still expect credit standards for loans to enterprises to remain unchanged. However, the percentage of banks expecting a slight easing of overall credit standards for loans to businesses was higher compared to those expecting the opposite, particularly for top corporations, large middle-market enterprises, and SMEs. Respondent banks cited expectations of an increase in the deposit base, higher tolerance for risk, and improvement in the liquidity of banks’ portfolio as among the reasons behind the expected net easing of credit standards.

Most respondent banks report unchanged credit standards for loans to households.

Q1 Q2 Q3 Q4 Q1 Q2

Tightened considerably 5.0 5.0 4.8 0.0 0.0 0.0

Tightened somewhat 10.0 0.0 9.5 14.3 10.5 9.5

Remained basically unchanged 80.0 95.0 81.0 85.7 84.2 81.0

Eased somewhat 5.0 0.0 4.8 0.0 5.3 9.5

Eased considerably 0.0 0.0 0.0 0.0 0.0 0.0

Total 100.0 100.0 100.0 100.0 100.0 100.0

Diffusion Index for Credit Standards 10.0 5.0 9.5 14.3 5.3 0.0

Number of banks responding 20.0 20.0 21.0 21.0 19.0 21.0

2014

General Credit Standards for Loans to Households (Overall)

2015

Note: A positive diffusion index for credit standards indicates that more banks have tightened

their credit standards compared to those that eased (“net tightening”), whereas a negative

diffusion index for credit standards indicates that more banks have eased their credit standards

compared to those that tightened (“net easing”).

Lending to Households The survey results likewise showed that most of the respondent banks (81.0 percent) continued to report unchanged overall credit standards for loans extended to households. The respondent banks’ unchanged tolerance for risk as well the unchanged profile of borrowers contributed to the unchanged credit standards for household loans in Q2 2015. In particular, banks’ responses indicated unchanged loan margins, loan covenants, and loan maturities along with steady use of interest rate floors for loans to households.

33

The survey questionnaire identified six specific credit standards: (1) loan margins (price-based); (2) collateral requirements; (3) loan covenants; (4) size of credit lines; (5) length of loan maturities; and (6) interest rate floors. A loan covenant is an agreement or stipulation laid down in loan contracts, particularly contracts with enterprises, under which the borrower pledges either to take certain action (an affirmative covenant), or to refrain from taking certain action (a negative covenant); this is consequently part of the terms and conditions of the loan. Meanwhile, an interest rate floor refers to a minimum interest rate for loans. Greater use of interest rate floor implies tightening while less use indicates otherwise.

29

Loan demand from both enterprises and households is unchanged.

Most of the respondent banks foresee maintaining their overall credit standards over the next quarter. However, some banks expect overall credit standards to ease slightly due largely to expectations of banks’ increased tolerance for risk. Loan demand Responses to the survey question on loan demand indicated that the majority of the respondent banks continued to see unchanged overall demand for loans from both enterprises and households. Using the DI approach, however, a net increase in overall demand34 for loans from both enterprises and households was continued to be observed. The net increase in loan demand of firms was attributed by banks to increased inventory and working capital needs of borrower firms and clients’ improved economic outlook, among others. Meanwhile, the net increase in overall demand for household loans reflected higher household consumption and housing investment. Looking ahead, most of the respondent banks expect unchanged loan demand for loans to both firms and households. However, a larger proportion of respondents expect overall demand for loans to increase further in the next quarter relative to those who indicated the opposite. The expected net increase in loan demand by firms was attributed by respondent banks to the higher inventory and working capital financing needs of borrower firms along with the improved economic outlook of clients, banks’ more attractive financing terms and lower interest rates. Meanwhile, expectations of higher household consumption, higher housing investment, lower interest rates, and banks’ more attractive financing terms were cited by respondent banks as key factors behind the anticipated increase in demand for household loans.

34

The “DI for loan demand” refers to the percentage difference between banks reporting an increase in loan demand and banks reporting a decrease. A positive DI for loan demand indicates that more banks reported an increase in loan demand compared to those stating the opposite, whereas a negative DI for loan demand implies that more banks reported a decrease in loan demand compared to those reporting an increase.

30

Credit standards for commercial real estate loans are steady.

Special Questions on Commercial Real Estate Loans

Most of the respondent banks (86.4 percent) in Q2 2015 indicated unchanged overall credit standards for commercial real estate loans using the modal approach. However, based on the DI approach, a net tightening of overall credit standards was noted for commercial real estate loans for the 12th consecutive quarter. The net tightening of overall credit standards for commercial real estate loans was attributed by respondent banks to perceived stricter oversight of banks’ real estate exposure along with banks’ reduced tolerance for risk. In particular, respondent banks reported stricter collateral requirements and loan covenants along with wider loan margins, shorter loan maturities, and increased use of interest rate floors for commercial real estate loans. For the next quarter, most of the respondent banks expect to maintain their credit standards for commercial real estate loans. However, banks that anticipate a tightening of their credit standards outnumbered those expecting the opposite. Demand for commercial real estate loans was also unchanged in Q2 2015 based on the modal approach. A number of banks, however, indicated increased demand for the said type of loan on the back of clients’ improved economic outlook and banks’ more attractive financing terms. Over the next quarter, although most of the respondent banks anticipate generally steady loan demand, a number of banks expect demand for commercial real estate loans to continue increasing in the following quarter. Similarly, credit standards for housing loans extended to households showed net tightening in Q2 2015 based on the DI approach. The tighter credit standards for housing loans were attributed by respondent banks to perceived stricter financial system regulations along with banks’ reduced tolerance for risk and deterioration in the profile of borrowers. For the next quarter, respondent banks expect unchanged credit standards for housing loans.

31

At the same time, results continued to show increased demand for housing loans in Q2 2015 as well expectations of continued increase in demand for the said type of loan in the next quarter.

Interest Rates T-bill rates in the primary market increase.

0

1

2

3

4

Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2

91-day T-bill Rate 182-day T-bill Rate 364-day T-bill Rate

2011

Treasury Bill Rates

2012

in p

erc

en

t

2013 2014 2015

The yield curve flattens.

0

1

2

3

4

5

6

3Mo 6Mo 1Yr 2Yr 3yr 4Yr 5Yr 7Yr 10Yr 20Yr 25Yr

Jun 2014 Mar 2015 Jun 2015

Yields of Government Securities in the Secondary Market

Maturity

in p

erc

en

t

Interest rate differentials widen.

Primary Interest Rates In Q2 2015, the average 91-day, 182-day, and 364-day T-bill rates in the primary market increased to 1.940 percent, 2.207 percent, and 2.263 percent from 1.469 percent, 1.729 percent, and 1.948 percent, respectively, in Q1 2015. The increase in T-bill rates reflected the government’s expectations that interest rates would go up in the near term as the market braces for the increase in yields in the US. Yield Curve The secondary market yield of GS rose generally, except for the 3-month, 6-month, 2-year, and 20-year GS, as of end-June 2015 relative to the end-March 2015 levels. The yields for longer maturities (except 20-year GS) rose on cautious market sentiment amid expectations of tightening by the US Federal Reserve. Debt paper yields were higher by a range of 1.9 bps (7-year GS) to 75.8 bps (5-year GS) compared to end-March 2015 levels. By contrast, the interest rate for the 3-month, 6-month, 2-year, and 20-year GS declined by 22.7 bps, 40.8 bps, 11.0 bps, and 42.8 bps, respectively. Relative to year-ago levels, the secondary market yields of GS increased by a range of 11.9 bps for the 7-year GS to 92.7 bps for the 3-month GS except for the 20-year GS which declined by 49.9 bps. Interest Rate Differentials The average differentials between domestic and US interest rates, gross and net of tax, widened further in Q2 2015 relative to the previous quarter. The average 91-day RP T-bill rate rose q-o-q by 49.8 bps to 1.949 percent in Q2 2015

32

-50

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Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2

RP 91-day T-bill vs. US 90-day LIBOR (before tax) RP 91-day T-bill vs. US 90-day T-bill (before tax)

RP 91-day T-bill vs. US 90-day LIBOR (after tax) RP 91-day T-bill vs. US 90-day T-bill (after tax)

Interest Rate Differentials

2011 2012

qu

arte

rly

aver

ages

; in

bas

is p

oin

ts

2013 2014 2015

-1

0

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2

3

4

5

Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2

BSP RRP Rate US Federal Funds Target Rate

2011 2012

BSP RRP Rate and US Federal Funds Target Rate

in p

erc

en

t

2013 2014 2015

150

175

200

225

250

275

300

325

Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2

Risk-Adjusted Differentials

2011 2012

in b

asi

s p

oin

ts

2013 2014 2015 Real lending rate increases.

-1

0

1

2

3

4

Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2

Philippines' Real Lending Rate

2011 2012

in p

erc

en

t

2013 2014 2015

from 1.451 percent in Q1 2015. Meanwhile, the average US 90-day LIBOR increased by 1.9 bps to 0.279 percent in Q2 2015, whereas the average US 90-day T-bill rate decreased by 5.1 bps to 0.030 percent. The domestic interest rate rose during the quarter amid speculations of an anticipated rise in US interest rates. However, foreign interest rates showed mixed trends amid renewed market concerns over the escalating debt crisis in Greece as well as the continued sell-off in eurozone government bonds, and the expectation that the US Fed will hike interest rates in 2015. The positive differential between the BSP's overnight borrowing or RRP rate and the US federal funds target rate was unchanged at 375 bps in Q2 2015, as the policy settings for both central banks were kept steady. Meanwhile, the interest rate differential between the BSP’s overnight RRP rate and the US federal funds target rate adjusted for country risk premium35 widened to 275 bps as of end-June 2015 from 249 bps in end-March 2015. This development could be traced to the lower risk premium given the larger increase in the 10-year US note, relative to that of 10-year ROP yield, to 2.34 percent and 3.33 percent, respectively. The 10-year US note rose, consistent with the outlook of monetary policy normalization, following the release of better-than-expected US housing market and jobs data.

The real lending rate36 rose to 2.7 percent in June

2015 from 1.5 percent in March 2015. This was

due to the 120-bp decline in inflation to

1.2 percent in June 2015 from 2.4 percent in

March 2015 as the actual bank lending rate37

remained at 3.9 percent. The Philippines posted

the fourth to the lowest real lending rate in a

sample of 10 Asian countries, with Thailand

recording the highest real lending rate at

7.8 percent and Japan the lowest at 0.7 percent.

35

The difference between the 10-year ROP note and the 10-year US Treasury note is used as proxy for the risk premium.

36 Real lending rate is measured as the difference between actual bank lending rate and inflation.

37 The actual bank lending rate for the Philippines is the weighted average interest rate charged by reporting commercial banks on loans and discounts granted during the period.

33

Financial Market Conditions Domestic financial market conditions remain generally favorable. Investor sentiments boosted early in the quarter by robust Q4 2014 GDP and easing Q1 2015 inflation.

However, the slower Q1 GDP growth and external headwinds dampened investors’ initial optimism.

The manageable inflation environment and favorable domestic outlook continued to support a generally positive investor sentiment during the review quarter. However, pockets of volatility were evident, fuelled by renewed fears of a US policy rate hike and the unfolding Greece debt crisis toward end-June. Nonetheless, the performance of the domestic financial market remained favorable compared to other countries in the region. Stock Market The Philippine Stock Exchange index (PSEi) averaged 7,760.08 index points during the period April-June 2015, a slight 1.0 percent higher than the average of 7,681.71 index points registered in the preceding three months. The stock market started strong during the period, boosted by the robust 6.6 percent GDP growth reported for Q4 2014 and the easing headline inflation in the first quarter of 2015. However, the PSEi drifted lower from mid-April on investor concerns over high stock valuations, the slower economic growth reported for Q1 2015 and presence of external headwinds. Hence, from the 27th all-time high of 8,127.48 index points posted on April 10, the PSEi retreated by 6.9 percent to close at 7,564.50 index points in end-June. On the domestic front, investors expressed concern that Philippine shares remained one of the most expensive in the region at over 20x. The disappointing 5.2 percent y-o-y GDP growth reported in end-May for Q1 2015 further dampened sentiments. Overseas, the slower Chinese GDP growth of 7.0 percent reported for Q1 2015 also led investors to trade cautiously. In contrast, the solid economic data from the US (i.e., manufacturing and non-farm payroll) had a similar dampening effect on demand for emerging market assets as it renewed fears that the Fed will start raising interest rates as early as September and tighten global liquidity conditions. Meanwhile, in Europe, the failure of Greece to reach any agreement with its official creditors38 and repay

38

These include the European Commission, European Central Bank and the International Monetary Fund.

34

Hence, except for the rise in the average PSEi, other stock market indicators declined during the quarter as investors’ retreated. Demand for local GS remains strong.

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s

Total Oversubscription of T-bill Auctions

Q2 2015P94.4B

Source: Bureau of the Treasury.

the €1.5 billion it owes the IMF that was due on June 30, coupled with the closure of its banks and its imposition of capital controls, extended investors’ cautious trading streak. These external developments raised risk aversion and prompted foreign funds to cash out of the local bourse, pushing the index lower in end-June, reversing the gains posted at the start of the quarter. Hence, foreign investors’ transactions reversed from net purchases of P48.86 billion from January-March into net sales of P30.95 billion from April-June. Mirroring the retreat of foreign investors, total stock market capitalization fell by 2.5 percent from P14.98 trillion in end-March to P14.60 trillion in end-June. Moreover, data from Bloomberg indicated that the price-earnings ratio of listed issues declined slightly from an average of 21.6x from January-March to an average of 21.5x from April-June. At this level, Philippine shares remain the second most expensive in the ASEAN-5, after Indonesia’s 23.0x average. Government Securities Results of the T-bill auctions conducted in Q2 2015 (April-June) continued to show robust demand for T-bills with total oversubscription for the quarter amounting to P94.4 billion, about 1.6 times the P60.0 billion total offered amount. The Auction Committee made partial awards of the offered amounts in all three auctions conducted during the quarter. During the auction on 6 April, the Auction Committee awarded in full the offered amount for the 91-day T-bills. However, partial awards were made for the 182-day and 364-day T-bills. On 4 May auction, partial awards were made for the 91-day, 182-day and 364-day T-bills. Meanwhile, during the 1 June auction, the Auction Committee made full awards for the 91-day and 182-days but decided to partially award the 364-day T-bills. The auction results reflected the government’s healthy cash disposition amid expectations of an upsurge in interest rates in the medium term as the market repositions for the increase in yields in the US.

35

Debt spreads narrow as investors clamor for lower premiums on EM debt.

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in b

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Quarterly Philippine Sovereign 5-Year CDS Spreads

Philippines Indonesia Thailand Malaysia88.5 bps 164.7 bps 103.5 bps 122.4 bps

Source: Bloomberg.

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in b

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Quarterly JPMorgan EMBI+ Sovereign Bond Spreads

EMBI+Philippines107.9 bps

EMBI+Global379.7 bps

Source: Bloomberg.

Sovereign Bond and CDS Spreads The cost of insuring Philippine sovereign debt declined in the second quarter of 2015. The country’s 5-year sovereign credit default swap (CDS) spreads averaged 88.5 bps in Q2 2015, down from 92.7 bps average in the previous quarter. In comparison with neighboring economies, the Philippine CDS traded lower than Indonesia’s average of 164.7 bps, Malaysia’s 122.4 bps and Thailand’s 103.5 bps. The risk premium from holding a Philippine sovereign bond over a similarly tenured US Treasury bond likewise declined as indicated by the lower EMBI+Philippine spreads which averaged 107.9 bps, lower than the previous quarter’s 128.2 bps. Debt spreads started to narrow in April as investors demanded lower premium on emerging market (EM) debt. Evidence of slowing growth momentum in the US raised expectations that the Fed may delay its rate hike this year which in turn led markets and the very low interest rates in the Eurozone drove investors to seek the relatively higher yields of emerging market bonds that pushed yields lower and spreads narrower. At the local front, the rise in the Philippine growth forecast by Fitch Rating, S&P, and the IMF contributed to the tightening of the country’s debt spreads. The narrowing trend continued toward the third week of May, supported by upbeat first quarter corporate earnings and benign inflation in April. However, debt spreads took a negative turnaround by end-May and continued to widen significantly by mid-June. The weaker-than-expected first quarter Philippine GDP growth translated to higher yields and wider debt spreads. The significant fall in China’s composite index and the mixed signals from US Fed members, which gave no clear indication of when impending rate hikes would take place, left market participants reluctant to take new positions, and thereby contributed to the negative sentiment. The mounting concerns over the Greece debt crisis also sent debt spreads around the world higher.

36

The Philippines’ 5-year sovereign CDS stood at 91.4 bps as of end-Q2 2015, previous quarter’s lower than the 92.5 bps. It has likewise remained lower than Indonesia’s 174.8 bps, Malaysia’s 137.8 bps and Thailand’s 105.5 bps. The EMBI+Philippines also ended the review quarter narrower at 114 bps compared to the previous quarter’s closing of 123 bps.

Banking System Philippine banking system maintains strong stance as economic outlook remains favorable.

U/KBs account for the largest share in the resource base.

The Philippine banking system continues to register strong performance in Q2 2015, reflective of firm economic activity. Banks’ balance sheets were marked by a sustained growth in assets and deposits. Asset quality indicators also continued to improve, while capital adequacy ratios remained above international standards, even with the implementation of the tighter Basel III framework. Savings Mobilization Savings and time deposits remained the primary sources of funds for the banking system. Banks’ total deposits39 as of end-May 2015 amounted to P6.6 trillion, 8.3 percent or P508.2 billion higher than the year-ago level. The rise in deposits in end-May 2015 was an improvement from the 7.5 percent rise posted in end-Q1 2015. Savings and demand deposits expanded by 7.9 percent and 13.9 percent, respectively.40 Time deposits likewise grew by 4.0 percent to P68.2 billion during the review period. Meanwhile, foreign currency deposits (FCD-Residents) owned by residents, grew by 10.1 percent, y-o-y.41 Institutional Developments

The increase in the resources of the banking system slowed down to 8.9 percent to P11.4 trillion as of end-March 2015 from the

39

This refers to the total peso-denominated deposits of the banking system. 40

The domestic liquidity or M3 growth in March 2015 also reflects statistical base effects associated with the significant increase in domestic liquidity a year ago of 35.3 percent, following the operational adjustments involving access of trust entities to the BSP SDA facility, which were completed in November 2013. Along with the savings, time and demand deposits, M3 includes currency in circulation and deposit substitutes.

41 M4 is the sum of M3 and FCD-Residents.

37

Asset quality of Philippine banks continues to improve, year-on-year.

year-ago level of P10.4 trillion. The deceleration from the 11.8 percent growth in Q4 2014 could be traced to the slower growth of bank lending. U/KBs accounted for 90 percent of the total resources of the banking system. As a percent of GDP, total resources slightly decreased to 88.9 percent in Q1 2015. The number of banking institutions (head offices) fell to 646 as of end-March 2015 from the year- and quarter- ago levels of 667 and 648, respectively, indicating continued consolidation of banks as well as the exit of weaker players in the banking system. By banking classification, banks (head offices) consisted of 36 universal and commercial banks (U/KBs), 69 thrift banks (TBs), and 541 rural banks (RBs). Meanwhile, the operating network (head offices and branches/agencies) of the banking system expanded to 10,456 offices in Q1 2015 from 10,020 offices during the same period in the previous year and 10,361 offices in Q4 2014, due mainly to the increase in the branches/agencies of U/KBs, TBs and RBs. The Philippine banking system’s GNPL ratio, at 2.5 percent as of end-March 2015, was lower than the year-ago’s 2.8 percent but slightly higher than the quarter-ago’s 2.3 percent.42 Nevertheless, banks’ initiatives to improve their asset quality along with prudent lending regulations helped maintain the GNPL ratio to a level below its pre-Asian crisis at 3.5 percent43. Compared to the previous quarter, the Q1 2015 GNPL ratio reflected the combined effect of the GNPL expansion by P6.2 billion, from P134.8 billion in Q4 2014 to P141.1 billion, and the banking system’s TLP decline by P101.0 billion, from P5.8 trillion in Q4 2014 to P5.7 trillion. Similarly, the net non-performing loan (NNPL) ratio rose slightly to 0.7 percent from 0.6 percent in the year- and quarter-ago ratios. In computing for the NNPLs, specific allowances for credit losses44 on TLP are deducted from the GNPLs. The said allowances increased to P102.7 billion in

42

For comparative purposes, computations for periods prior to January 2013 are aligned with Circular No. 772. Certain ratios were rounded-off to the nearest hundredths to show marginal movements.

43 The 3.5 percent NPL ratio was based on the pre-2013 definition.

44 This type of provisioning applies to loan accounts classified under loans especially mentioned (LEM), substandard-secured loans, substandard-unsecured loans, doubtful accounts and loans considered as loss accounts.

38

Banks sustain adequate capital levels amid tighter capital requirements.

Q1 2015 from the P100.1 billion posted a quarter ago. The Philippine banking system’s GNPL ratio of 2.5 percent was higher relative to Indonesia (2.3 percent), South Korea (1.6 percent), Thailand (2.3 percent), and Malaysia (1.2 percent).45 The loan exposures of banks remained adequately covered as the banking system registered an NPL coverage ratio of 116.7 percent. The Q1 2015 ratio was lower than the 119.8 percent posted last end-December 2014 but marginally higher than the year-ago ratio of 116.2 percent. The ratio is indicative of banks’ continued compliance with the loan-loss provisioning requirements of the BSP to ensure adequate buffers against potential credit losses. Compliance with the BSP capital framework for U/KBs under the Basel III framework46 took effect in 1 January 2014. The new Basel III regime incorporates adjustments to the treatment of bank capital in ways that enhance the use of the CAR as a prudential measure.

The CARs of U/KBs stood at 15.2 percent and 16.2 percent on solo and consolidated bases respectively, at end-2014. These figures are well-above the BSP regulatory threshold of 10.0 percent and international minimum of 8.0 percent.

Compared to the previous year, the CAR figures slid from 16.5 percent and 17.7 percent on solo and consolidated basis, respectively. The decline reflected the new treatment of “bank capital” applicable to FBBs as required under Republic Act 10641, or “An Act Allowing Full Entry of Foreign

45

Sources: Various central bank websites, IMF and financial stability reports, Indonesia (commercial banks, Q3 2014); Malaysia (banking system [impaired loans/net loans], Q1 2015); Thailand (commercial banks, Q1 2015); and South Korea (domestic banks, Q1 2015).

46 Basel III no longer counts toward “bank capital” those Basel II-compliant capital instruments that do not have the feature of loss absorbency. Loss absorbency refers to the ability of bank-eligible capital instruments other than common equity to behave and act in the same way as common equity shares at the point where the bank takes losses and becomes non-viable. In addition, Basel III now deducts from capital the investments of banks in non-allied undertakings, defined benefit pension fund assets, goodwill and other intangible assets.

39

Exchange Rate The peso weakens on uncertainties over US policy rate normalization.

38

39

40

41

42

43

44

45

46

Q12011

Q2 Q3 Q4 Q12012

Q2 Q3 Q4 Q12013

Q2 Q3 Q4 Q12014

Q2 Q3 Q4 Q12015

Q2

Ph

p/U

S$

Quarterly Peso-Dollar Rate

Q2 2015P44.67/US$1

Source: Reference Exchange Rate Bulletin, Treasury Department, BSP.

Banks in the Philippines”. This law became effective in the last quarter of 2014.47

The industry’s capital structure remains primarily composed of high quality Common Equity Tier 1 (CET 1). At end-2014, the U/KBs’ CET 1 comprised 12.5 percent and 13.6 percent of their risk weighted assets (RWAs) on solo and consolidated bases. The banks’ Tier 1 ratio, on the other hand, stood at 12.7 percent and 13.8 percent on solo and consolidated bases.

Meanwhile, the RWAs of the U/KB industry rose by 6.8 percent, q-o-q, at end-2014, due to a P357.2 billion increase in loans to the corporate sector. The CAR of U/KBs on a consolidated basis at 16.2 percent was higher than those of Malaysia (15.2 percent) and South Korea (13.9 percent), but lower compared to those of Indonesia (19.5 percent) and Thailand (16.6 percent).48

For the second quarter of 2015, the peso depreciated against the US dollar by 0.6 percent to average P44.67/US$1 from the previous quarter’s average of P44.42/US$1, and by 1.2 percent relative to the P44.13/US$1 average in Q2 2014.49 The weakness of the peso during the review quarter was mainly on account of global uncertainty on the timing and potential impact of US policy rate normalization. Nonetheless, the sustained inflows of foreign exchange from overseas Filipino remittances, BPO and tourism receipts, and foreign direct investments, as well as the ample level of the country’s gross international reserves provided support to the peso.50

In April 2015, the peso strengthened slightly to average P44.41/US$1 relative to the P44.45/US$1 average in March. This reflects weak market

47

The new framework for FBBs provides that bank capital should mainly consist of Permanently Assigned Capital (PAC) and derecognizes the “Net Due To” account from regulatory capital.

48 Sources: Various central bank websites, IMF and financial stability reports, Indonesia (commercial banks, Q3 2014); Thailand (commercial banks, Q1 2015); Malaysia (banking system, Q1 2015); and Korea (bank holding companies, Q1 2015).

49 Dollar rates or the reciprocal of the peso-dollar rates were used to compute for the percentage change.

50 GIR stood at US$80.9 billion as of end-June 2015 (preliminary).

40

Changes in Selected Dollar Rates

Year-to-date

Appr./(Depr.), in percent

31 Mar ‘15* 30 Jun ‘15**

Philippine peso 0.01 (0.82)

Thai baht (onshore) 1.20 (2.58)

Chinese yuan 0.07 0.07

Malaysian ringgit (5.86) (7.31)

South Korean won (1.86) (2.13)

Singaporean dollar (3.71) (1.41)

New Taiwan dollar 1.22 2.58

Indonesian rupiah (5.33) (7.01)

Japanese yen (0.40) (2.01)

Source: Bloomberg, Reuters and PDEX

• As of 4:00 p.m., 31 March 2015

** As of 4:00 p.m., 30 June 2015

sentiment toward the US dollar as a string of disappointing data in the US on unemployment,51 retail sales,52 manufacturing,53 and new home sales54 raised uncertainty on the outlook for interest rate hike by the US Fed. Meanwhile, the peso weakened in May to average P44.61/US$1 on account of the improving employment and manufacturing data in the US (signaling a moderate pace of growth in the US), which boosted prospect for a US Fed interest rate hike later this year.55,56 Further, the outflow of foreign portfolio investments due to profit taking and repatriation of sales proceeds of investments in PSE-listed stocks and peso government securities weighed down on the peso.57 In June, the peso depreciated further to average P44.98/US$1 on heightened expectations that the US Fed lift-off will take place in September this year, following the better-than-expected jobs data and strong retail sales in the US.58,59

On a year-to-date basis, the peso depreciated against the US dollar by 0.8 percent on 30 June 2015 as it closed at P45.09/US$1, moving in tandem with most Asian currencies except the New Taiwan dollar and Chinese yuan which appreciated vis-à-vis the US dollar.60 Meanwhile, volatility, as measured by the coefficient of variation (COV) of the peso’s daily closing rates stood at 0.65 percent during the second quarter, slightly lower compared with

51

US nonfarm payrolls increased by 126,000 in March 2015 after a downwardly revised 264,000 rise in February, the smallest gain since December of 2013. (Source: US Bureau of Labor Statistics)

52 Retail sales grew by 0.9 percent in March 2015, slightly lower than the 1.1 percent forecast, while the US Producer Price Index grew by 0.2 percent, also lower than the 0.3 percent month on month expectation. (Source of basic data: Bloomberg)

53 US manufacturing data on capacity utilization fell to 78.4 percent in March from 79 percent in February, while industrial production also contracted by 0.6 percent versus the 0.3 percent expected contraction. (Source of basic data: Bloomberg)

54 Sales of new US homes plunged to 481,000 in March after a sharp rise of 543,000 sales in February. (Source: US Census Bureau)

55 US non-farm payrolls increased 223,000 as gains in services sector and construction jobs offset weakness in mining. Meanwhile US unemployment rate declined from 5.7 in February 2015 to 5.6 percent in March (Source: US Labor Department).

56 Manufacturing PMI in the US climbed to 52.8 index points in May 2015 from 51.5 index points in April (Source: US Institute for Supply Management).

57 Transactions in foreign portfolio investments during May 2015 resulted in overall net outflows of US$569 million compared to US$31 million in April.

58 US non-farm payroll increased by 280,000 in May 2015 relative to the 221,000 increase in jobs in April. (Source: Bureau of Labor Statistics)

59 US retails sales increased by 1.2 percent in May 2015 from 0.2 percent gain in April (Source: US Department of Commerce).

60 Based on the last done deal in the afternoon.

41

0.69 percent in the previous quarter as the market await clearer leads on the US Fed lift-off.61

On a real trade-weighted basis, during the period April to May 2015, the peso gained external price competitiveness against the basket of currencies of all trading partners (TPI) and trading partners in developing countries (TPI-D) as the real effective exchange rate (REER) index of the peso decreased by 1.47 percent and 1.20 percent, respectively, relative to the first quarter of 2015 due to the combined effects of the nominal depreciation of the peso and narrowing inflation differential against these currency baskets. Against the basket of currencies of trading partners in advanced countries (TPI-A), the peso likewise gained external price competitiveness as the narrowing inflation differential offset the nominal appreciation of the peso resulting in a real depreciation of the peso by1.82 percent.62,63

Relative to the second quarter of 2014, the peso lost external price competitiveness against the basket of currencies of TPI, TPI-A, and TPI-D as the peso appreciated in real terms by 7.5 percent, 13.9 percent, and 3.0 percent, respectively, due to the combined effects of the nominal appreciation of the peso and positive inflation differential against these currency baskets.

61

The coefficient of variation is computed as the standard deviation of the daily exchange rate divided by the average exchange rates for the period.

62 The Trading Partners Index (TPI) measures the nominal and real effective exchange rates of the peso across the currencies of 14 major trading partners of the Philippines, which includes US, Euro Area, Japan, Australia, China, Singapore, South Korea, Hong Kong, Malaysia, Taiwan, Indonesia, Saudi Arabia, United Arab Emirates, and Thailand. The TPI-Advanced measures the effective exchange rates of the peso across currencies of trading partners in advanced countries comprising of the US, Japan, Euro Area, and Australia. The TPI-Developing measures the effective exchange rates of the peso across 10 currencies of partner developing countries which includes China, Singapore, South Korea, Hong Kong, Malaysia, Taiwan, Indonesia, Saudi Arabia, United Arab Emirates, and Thailand.

63 The REER index represents the Nominal Effective Exchange Rate (NEER) index of the peso, adjusted for inflation rate differentials with the countries whose currencies comprise the NEER index basket. A decrease in the REER index indicates some gain in the external price competitiveness of the peso, while a significant increase indicates the opposite. The NEER index, meanwhile, represents the weighted average exchange rate of the peso vis-à-vis a basket of foreign currencies.

42

III. FISCAL DEVELOPMENTS

NG posts surplus as of end-April 2015.

National Government Fiscal PerformanceIn billion pesos

January-April Growth

(%)2014 2015

Surplus/(Deficit) (3.3) 19.1 (684.0)

Revenues 622.9 679.6 9.0

Expenditures 626.1 660.6 5.0

*Totals may not add up due to rounding

Source: BTR

The National Government (NG) recorded a fiscal surplus of P19.1 billion for the period January-April 2015, a reversal from the P3.3-billion deficit incurred in the same period in 2014. Netting out the interest payments in the expenditures, the primary surplus amounted to P135.4 billion, P22.1 billion or 20.0 percent higher than the level recorded in the same period a year ago. Revenue collections increased by 9.0 percent to P679.6 billion as of end-April 2015 compared to P622.9 billion in the same period in 2014, due largely to higher collections by the Bureau of Internal Revenue (BIR). The BIR contributed P467.9 billion to total revenues during the current period, representing an increase of 11.0 percent from its year-ago level. Likewise, collections by the Bureau of Customs (BOC) and revenues from other offices rose to P120.4 billion and P41.9 billion, respectively, from P117.3 billion and P33.0 billion as of end-April 2014. Meanwhile, income generated and collected by the Bureau of the Treasury declined by 5.0 percent to P49.5 billion, due in part to the NG’s reduced bond holdings and lower dividend collections in April 2015. Expenditures in January-April 2015 amounted to P660.6 billion, 5.0 percent higher than the expenditures in the same period in 2014. Excluding interest payments, expenditures went up by 7.0 percent to P544.3 billion. Meanwhile, interest payment was P0.2-billion lower compared to its year-ago level, reaching P116.3 billion as of end-April 2015.

43

IV. EXTERNAL DEVELOPMENTS

Overall global economic activity stays firm. Economic growth in the US remains robust.

Growth in the US remains robust, while economic activity in the euro area and Japan appears to have improved. Meanwhile growth across emerging Asia, including China and India, has remained broadly subdued. On balance, economic growth across the globe is expected to remain uneven, while inflation pressures are likely to remain benign as prospects for the prices of oil and other commodities continue to be soft. The JP Morgan Global All-Industry Output Index eased to 53.6 in May from 54.2 in April, signaling a sustained albeit slightly slower pace of output growth as the acceleration in manufacturing production was offset by a slowdown in services. New business flows and new orders were likewise slower during the month. Output growth continued to be strong in the US, UK, and Spain. Growth in the euro area remained solid with firm rates of expansion in Germany and Italy. Meanwhile, economic activity in major Asian economies was relatively subdued, as China, India, and Japan all registered modest rates of growth. Output in Russia expanded for the second straight month, while Brazil contracted at the fastest pace in six years.64 US Real GDP decreased by 0.2 percent q-o-q in Q1 2015 after expanding by 2.2 percent in the previous quarter. On a y-o-y basis, real output growth was faster at 2.9 percent compared to 2.4 percent in Q4 2014. The q-o-q contraction during the quarter reflected a decline in exports, nonresidential fixed investment, and state and local government spending, as well as an increase in imports.65 The manufacturing PMI rose to 53.5 in June from 52.8 in May.66 Business sentiment remained upbeat mainly on indications of stable to improving business conditions.

64

JP Morgan Global Manufacturing & Services PMI, http://www.markiteconomics.com/Survey/ PressRelease.mvc/c690870f3b0d41f5bcc2647ff00ce73f. 65

US Bureau of Economic Analysis, “National Income and Product Accounts Gross Domestic Product: First Quarter 2015 (Third Estimate),” news release, 24 June 2015. http://www.bea.gov/newsreleases/national/gdp/2015/pdf/gdp1q15_3rd.pdf.

66 Institute for Supply Management, “June 2015 Manufacturing ISM Report On Business”, 1 July 2015, http://www.ism.ws/ISMReport/MfgROB.cfm.

44

Indicators point to brisker economic activity in the euro area.

Inflation on a y-o-y basis was nil in April from -0.2 percent in the previous month, as the index for gasoline increased while that for food was unchanged. Meanwhile, the unemployment rate rose slightly to 5.5 percent in May from 5.4 percent in April. Total nonfarm payroll employment increased by 280,000 in May, with gains noted in professional and business services, leisure and hospitality, and health care.

Measures of consumer confidence continued to indicate a generally optimistic outlook by households on account of broadly stable economic prospects, suggesting a favorable outlook for household spending for the rest of 2015. The Conference Board Consumer Confidence Index rose to 95.4 in May from 94.3 in the previous month,67 while the Thomson-Reuters/University of Michigan Index of Consumer Sentiment increased to 96.1 in June 90.7 in May.68 On a q-o-q basis, euro area real GDP grew by 0.4 percent in Q1 2015, the same pace of increase as in the previous quarter. On a y-o-y basis, real GDP growth was faster at 1.0 percent in Q1 2015 compared to 0.9 percent in Q4 2014.69 The composite PMI for the euro area rose from 53.6 in May to 54.1 in June, its highest level in four years, as growth accelerated in both the services and manufacturing sectors.70 However, growth in new orders slowed, reflecting uncertainty over the potential impact of the Greek debt crisis. Strong output growth was recorded across the region, particularly in Germany. The rate of output expansion also continued to improve in France. The European Commission’s Economic Sentiment Indicator for the euro area decreased slightly to 103.5 in June from 103.8 in May, as confidence in

67

“The Conference Board Consumer Confidence Index Rebounds.” 26 May March 2015. http://www.conference-board.org/data/consumerconfidence.cfm.

68“Confidence Records Best Six Months in Past Decade.” 26 June 2015. http://press.sca.isr.umich.edu/press/press_release.

69 Eurostat news release 99/2015 dated 9 June 2015.

70 Markit Eurozone Composite PMI (flash estimate), http://www.markiteconomics.com/Survey/

PressRelease.mvc/986c020abdb0457f9574c56ff8a80e79

45

Output growth improves slightly in Japan. Chinese manufacturing activity slows down further.

industry and retail trade eased. Consumer confidence was broadly stable.71 The seasonally adjusted unemployment rate was stable to 11.1 percent between April and May.72 Meanwhile, inflation declined to 0.2 percent in June from 0.3 percent in May.73 On a q-o-q basis, Japan’s real GDP increased by 1.0 percent in Q1 2015, faster than the 0.3-percent expansion in the previous quarter.74 Moreover, real GDP contracted at a slower rate of 0.9 percent y-o-y in Q1 2015, following the 1.0-percent decline in Q4 2014. The q-o-q growth during the quarter reflected improvements in private demand amid signs of steady growth in employment. Meanwhile, the seasonally adjusted manufacturing PMI eased to 50.1 in June from 50.9 in May, indicating sustained but slower growth in output. New export orders increased as the yen depreciated.75 Inflation declined to 0.5 percent y-o-y in May from 0.6 percent y-o-y in April. The seasonally adjusted unemployment rate was steady at 3.3 percent in April and May. China’s real GDP growth decelerated to 7.0 percent y-o-y in Q1 2015 from 7.3 percent in the previous quarter, as industrial production and investments in fixed assets slowed. Meanwhile, the seasonally adjusted manufacturing PMI remained below the neutral mark of 50.0 at 49.4 in June from 49.2 a month earlier, signaling a continued decline in manufacturing output.76 Inflation fell to 1.2 percent in May from 1.4 percent in the previous month. The prices of food, particularly meat, poultry and related

71

European Commission. http://ec.europa.eu/economy_finance/db_indicators/surveys/documents/ 2015/esi_2015_06_en.pdf. 72

Eurostat news release 117/2015 dated 30 June 2015. 73

Flash estimate only. Eurostat news release 118/2015 dated 30 June 2015. 74

Second estimates by the Department of National Accounts, Economic and Social Research Institute, Cabinet Office. http://www.esri.cao.go.jp/jp/sna/data/data_list/sokuhou/files/2015/qe151_2/

pdf/jikei_1.pdf 75

Nikkei Japan Manufacturing PMI, http://www.markiteconomics.com/Survey/PressRelease.mvc/ fcead8f7fe0f464391e3bcf2e748f75d 76

HSBC China Manufacturing PMI, http://www.markiteconomics.com/Survey/PressRelease.mvc/ 7927d2e0c3304a4593285c6db50f3c21

46

Growth conditions in India improve modestly. Major central banks ease their monetary policy settings in response to the decline in oil prices and to slow domestic economic growth.

products (especially pork) and fresh vegetables drove inflation. India’s real GDP increased by 7.5 percent y-o-y in Q1 2015, faster than the 6.6-percent expansion in the previous quarter.77,78 Meanwhile, the composite PMI declined slightly from 52.5 in April to 51.2 in May, as activity in the manufacturing sector accelerated while growth in the services sector moderated.79 Inflation based on the CPI increased to 5.0 percent in May from 4.9 percent in March. A number of central banks decided to ease their monetary policy settings during the quarter to help support domestic economic activity and guard against downside risks to inflation owing to the sharp decline in international oil prices. On 29 April 2015, the Bank of Thailand decided to reduce its policy rate by 25 bps from 1.75 percent to 1.5 percent. The monetary policy easing is in response to the sluggish growth of exports and private consumption in Q1 2015. The Reserve Bank of Australia cut its policy rate by 25 bps from 2.25 percent to 2.0 percent, effective 6 May 2015. The policy rate adjustment aims to provide additional support to domestic demand amid an anticipated decline in private business capital expenditure and in government spending in the coming months. On 19 April 2015, the People's Bank of China (PBoC) cut anew the reserve requirement ratio by 100 bps to 18.5 percent from 19.5 percent, effective 20 April 2015. The move was intended

77

Central Statistics Office of India. http://mospi.nic.in/Mospi_New/upload/nad_press_release_ 29may15.pdf. 78

Figures are based on a revised methodology by the Central Statistics Office (CSO) of India. (http://mospi.nic.in/Mospi_New/upload/Presss_note_for_Q3_AE_2014-15.pdf) The Reserve Bank of India, however, notes a significant divergence between the new, rebased series and the old data series, particularly for manufacturing, financial and real estate sectors: “In particular, the robust expansion of manufacturing portrayed in the new series is not validated by subdued corporate sector performance and still weak industrial production. In the financial and real estate sub-sector, the high growth…is not corroborated by the observed sluggishness in key underlying variables such as credit and deposit growth, housing prices, rent and most importantly, the subdued performance of real estate companies in terms of sales growth and earnings.”

79 HSBC India Services PMI (with Composite PMI Data), http://www.markiteconomics.com/Survey/

PressRelease.mvc/0402da3ac6b14faead90b85e5c38dac1

47

to help provide liquidity and credit to enterprises in support of economic growth. The PBoC also reduced the benchmark lending rate by 25 bps each in May and June to 4.85 percent. The policy rate cuts are aimed at further stimulating bank lending to support the slowing economy amid a slump in exports. The PBoC also reduced the benchmark deposit rate by a total of 50 bps to 2.0 percent during the quarter. The Reserve Bank of India reduced its policy rate by 25 bps from 7.50 percent to 7.25 percent, effective 2 June 2015, to support domestic economic activity amid low domestic capacity utilization and subdued investment and credit growth. Likewise, the Reserve Bank of New Zealand cut its official cash rate on 10 June by 25 bps to 3.25 percent in anticipation of weakening domestic demand amid an overvalued exchange rate and falling commodity prices.

Meanwhile, the potential domestic impact of the MERS outbreak coupled with softer export figures in South Korea has prompted the Bank of Korea to cut its base rate by 25 bps on 11 June to a record low of 1.50 percent.

48

V. MONETARY POLICY DEVELOPMENTS

The BSP maintains monetary policy settings during the quarter.

0

1

2

3

4

5

6

7

2011 2012 2013 2014 2015

in p

erce

nt

BSP Policy Rates

Overnight RRP Rate Overnight RP rate SDA rate

During its monetary policy meetings on 14 May and 25 June, the BSP decided to maintain its key policy interest rates at 4.0 percent for the overnight borrowing or RRP facility and 6.0 percent for the overnight lending or RP facility. The interest rates on term RRPs, RPs, and SDAs were also kept steady. The reserve requirement ratios were left unchanged as well.

The Monetary Board’s (MB) decision was based on its assessment that the inflation environment continued to be manageable. Latest baseline forecasts continue to indicate that inflation is likely to settle within the lower half of the target range of 3.0 percent ± 1 percentage point for 2015-2016, while inflation expectations remain firmly anchored following recent inflation outturns.

The MB likewise noted that the risks to the inflation outlook continued to be broadly balanced, with upside risks coming from pending petitions for power rate adjustments and the impact of stronger-than-expected El Niño dry weather conditions on food prices and utility rates. On the other hand, slower global economic activity could pose downside risks to inflation.

The Monetary Board noted that domestic demand conditions remain firm despite the lower-than-expected first-quarter output growth, supported by solid private household and capital spending as well as buoyant business confidence. At the same time, ample domestic liquidity and planned higher public spending are expected to further support domestic economic activity and sustain the economy’s momentum in the months ahead.

Given these considerations, the Monetary Board believes that prevailing monetary policy settings remain appropriately calibrated to the outlook for inflation and domestic economic activity. Going forward, the BSP will continue to monitor domestic and external developments to ensure that the monetary policy stance remains in line with maintaining price and financial stability.

49

VI. INFLATION OUTLOOK

BSP Inflation Forecasts80 Results of the latest BSP forecasting exercises indicate within-target inflation over the policy horizon.

Inflation is expected to remain manageable over the policy horizon. The latest BSP baseline forecast points to within-target inflation over the next two years. The inflation projection for 2015 is slightly lower compared to the previous quarter forecast due mainly to the lower-than-projected inflation in May as well as the lower-than-projected Q1 2015 GDP growth. Meanwhile, the inflation forecast for 2016 is broadly unchanged. The latest forecasts suggest that inflation could settle below the midpoint of the 3.0 percent ± 1.0 percentage point target range in 2015-2016. Demand Conditions Outturns for key demand indicators attest to the view of robust underlying momentum in real sector activity. Driven by steady household spending and improvements in fixed capital formation, domestic output growth expanded by 5.2 percent in Q1 2015. While the Q1 2015 GDP growth is slower compared to previous quarters and is below market expectations, growth fundamentals remain firm as domestic demand continues to be buoyant. Other real sector indicators support the view of a healthy domestic economy. Manufacturing indices suggest sustained expansion in production. Half of all major manufacturing sectors continued to operate above 80 percent of their capacity. Moreover, the composite PMI has consistently remained above the 50-point mark at 57.1 in April 2015. There have also been improvements in labor market conditions. The unemployment rate is lower compared to a year ago, based on the results of the April 2015 Labor Force Survey (LFS). The optimistic outlook for real economic activity has also been reflected in the results of the BSP business expectations survey, which showed a

80

The inflation forecast path in this report refers to the forecasts presented during the 25 June 2015 Monetary Policy Meeting. In the discussions, these forecasts are compared to the forecasts presented in the Q1 Inflation Report (or the forecasts during the 26 March 2014 Monetary Policy Meeting)

50

Favorable supply prospects point to manageable inflation environment.

more bullish outlook in Q2 2015 due to brisker business during the secondary harvest and fishing seasons, graduation and enrollment periods, and the summer season. This was also supported by the increase in construction activities for the infrastructure-related government projects. Moreover, the quarter ahead business outlook appears to be favorable. Supply Conditions Commodity prices are expected to remain manageable, owing to ample supply conditions. Food inflation is likely to remain benign over the near term given good harvests prospects. Similarly, international oil prices are projected to remain below 2014 levels as current oil market fundamentals persist in the coming months. However, some upside pressures could emerge. The strengthening of the ongoing El Niño weather disturbance could translate into higher food prices. In the oil market, some gradual increase is anticipated as the global oil market rebalances. The possibility of a sharp rebound in oil prices could also not be fully discounted given sizeable uncertainty on how current oil production would respond to further declines in prices. The Food and Agriculture Organization (FAO) estimates world cereal production to reach 2,524 million tonnes in 2015, lower by 1.0 percent compared to the record-high harvests registered in 2014. Ending cereal stocks for 2015 are forecasted at 634 million tonnes, 1.9 percent lower than 2014 inventories. The projected decline in inventories could lower cereals stocks-to-use ratio to 24.7 percent from the 25.6 percent average in the previous season. Nonetheless, current projections remain above the 18.5 percent average in 2007, which support the view of relatively stable cereal markets.81 In the domestic front, the PSA anticipates the second quarter palay production to decline by 4.2 percent compared to the same period last year on account of the dry spell experienced by several provinces in Luzon and Mindanao. Based on farmers’ planting intentions, third quarter

81

FAO, Cereal Supply and Demand Brief, 4 June 2015, available online at http://www.fao.org.

51

palay production, however, could strengthen by 11.7 percent. Similarly, corn production could decline by 14.4 percent in Q2 2015 due to unfavorable weather conditions, but could recover by 4.3 percent in the third quarter of the year. The anticipated growth in palay and corn production in Q3 2015 could be traced to expansions in harvest areas that are attributable to government interventions such as the provision of high-yielding seeds and the on-going rehabilitation of irrigation facilities.82 Forecasts from the Climate Prediction Center of the US National Oceanic and Atmospheric Administration (NOAA) and International Research Institute for Climate and Society (IRI) indicate an 80 percent chance of El Niño weather anomaly until Q1 2016. The prediction models indicate that a weak to moderate El Niño condition could prevail until July 2015 and strengthen until the later part of 2015. Meanwhile, the Philippine Atmospheric, Geophysical and Astronomical Services Administration (PAGASA) forecasted that the current weak El Niño weather disturbance could intensify to moderate strength in the coming months and last until early 2016.83 This could affect the rainfall patterns and result in warmer air temperatures over the coming months. On the whole, less favorable weather condition is expected to negatively impact agricultural production for the year. International oil prices have increased compared to the previous quarter’s level due to improving global oil demand, expected reduction in US tight oil production, and risks of possible oil supply disruptions in the Middle East and North Africa (MENA). For instance, reports showed that the number of US oil rigs drilling for crude oil fell for the 25th consecutive week as of 29 May and was 60 percent below its peak in October 2014.84 Looking ahead, futures prices of oil as well as forecasts by multilateral agencies suggest that oil prices are likely to remain below 2014 levels. There is, however, sizable risks surrounding the

82

PSA, Rice and Corn Situation Outlook, April 2015, available online at http://www.bas.gov.ph. 83

PAGASA, El Niño Advisory No. 4, 03 June 2015, available online at http://pagasa.dost.gov.ph. 84

EIA, Short-Term Energy Outlook, June 2015, available at http://www.eia.gov.

52

Output gap estimate narrows.

oil price forecasts. On one hand, a more limited non-OPEC supply response to the oil price decline and lifting of sanctions against Iran are downside risks. On the other hand, a more aggressive non-OPEC supply reduction to lower oil prices, alongside strengthening geopolitical tensions in the Middle East could lead to a sharper rebound in oil prices. The balance of demand and supply conditions as captured by the output gap (or the difference between actual and potential output), provides an indication of potential inflationary pressures in the near term. 85 Given the latest GDP data, preliminary estimates by the BSP show a lower positive output gap in Q1 2015 relative to the previous quarter. The output gap narrowed as the q‐o‐q expansion in potential output slightly outpaced actual output during the review period.86 Key assumptions used to generate the BSP’s inflation forecasts The BSP's baseline inflation forecasts generated from the BSP’s single equation model (SEM) and the multi‐equation model (MEM) are based on the following assumptions:

1) BSP’s overnight RRP rate at 4.00 percent from July 2015 to December 2016;

2) BSP’s reserve requirement at 20.0 percent from July 2015 to December 2016;

3) NG fiscal deficits for 2015 to 2016, which are consistent with the DBCC-approved estimates;

4) Dubai crude oil price assumptions, the trend of which is consistent with the trend of the futures prices of oil in the international market;

85

Inflation tends to rise (fall) when demand for goods and services exert pressure on the economy’s ability to produce goods and services, i.e., when the output gap is positive (negative).

86 Based on the seasonally-adjusted GDP growth

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Risks to the Inflation Outlook

The central inflation projection indicates inflation to likely settle below the midpoint of the announced target range. Risks to the inflation outlook are broadly balanced.

5) Increase in nominal wage of 5.6 percent in April 2016;

6) Real GDP growth is endogenously determined in the BSP’s MEM; and

7) Foreign exchange rate is endogenously determined in the BSP’s MEM through the purchasing power parity and interest rate parity relationships.

The risks to the inflation outlook may be presented graphically through a fan chart. The fan chart depicts the probability of different inflation outcomes based on the central projection (corresponding to the baseline forecast of the BSP) and the risks surrounding the inflation outlook. Compared to the previous inflation report, the latest fan chart presents a slight downward shift in the inflation projections for 2015 and a broadly similar path for 2016. The lower inflation projections for 2015 could be attributed mainly to lower-than-projected inflation outturn in May as well as lower-than-projected GDP growth in Q1 2015. The latest central inflation projections indicate that inflation would likely settle below the midpoint of the 3.0 percent ± 1.0 percentage inflation target range for 2015-2016. The latest fan chart also shows that there are uncertainties further out as shown by the widening bands of the chart over time. The BSP’s review of current price trends and risks to future inflation suggests that the distribution of risks of the inflation outlook are broadly balanced. This assessment is captured in the latest fan chart by the relatively balanced bands above and below the central projection. Pending petitions for power rate adjustments and the impact of stronger-than-expected El Niño dry weather conditions on food and utility prices represent upside risks to inflation. Slower global economic activity poses downside risk to inflation.

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The occurrence of stronger-than-expected El Niño weather disturbance could adversely impact domestic food supply. The said weather condition is expected to manifest as stronger-than-usual typhoons, which could impact negatively the planting season, ultimately posing a risk to food prices. In addition, drier weather conditions as a result of the El Niño weather phenomenon could adversely affect hydro-powered generation plants and raise the cost of electricity and water. The pending petition of Meralco on the December 2013 rate adjustment, which is still under the temporary restraining order of the Supreme Court, also continues to pose upside risk to the inflation outlook. Meanwhile, the possibility of a slower global economic growth could imply weaker demand-related price pressures. Financial market turbulence, particularly due to surprises in the US Federal Reserve policy actions, re-emergence of weakness in the euro area, geopolitical tensions in the Middle East, and weaker-than-expected performance of China represent downside risks to the global growth prospects.

55

The fan chart shows the probability of various outcomes for inflation over the forecast horizon. The darkest band depicts the central projection, which corresponds to the BSP’s baseline inflation forecast. It covers 25 percent of the probability distribution. Each successive pair of bands is drawn to cover a further 25 percent of probability, until 75 percent of the probability distribution is covered. Lastly, the lightest band covers the lower and upper 90 percent of the probability distribution. The bands widen (i.e., “fan out”) as the time frame is extended, indicating increasing uncertainty about outcomes. The band in wire mesh depicts the inflation profile in the previous report. The shaded area, which measures the range of uncertainty, is based on the forecast errors from the past years. In greater detail, it can be enhanced by adjusting the level of skewness of the downside and upside shocks that could affect the inflationary process over the next two years in order to change the balance of the probability area lying above or below the central projection.

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VII. IMPLICATIONS FOR THE MONETARY POLICY STANCE

The average headline inflation is projected to be within the inflation target range over the policy horizon.

Inflation expectations reflected in forecast surveys of private sector economists remain well-anchored.

Headline inflation and other price indicators ease further.

The latest average baseline forecasts show that the inflation rates could settle below the midpoint of the 3.0 percent ± 1.0 ppt inflation target range for 2015-2016.The inflation projection for 2015 is slightly lower compared to the previous quarter forecast due mainly to the lower-than-projected inflation in May as well as the lower-than-projected Q1 2015 GDP growth. Meanwhile, the inflation forecast for 2016 is broadly unchanged. Risks to the inflation outlook continue to be broadly balanced. Pending petitions for power rate adjustments and the impact of stronger-than-expected El Niño dry weather conditions on food and utility prices represent upside risks to inflation. Slower global economic activity poses downside risk to inflation. Results of the BSP’s survey of private sector economists for June 2015 yielded lower mean inflation forecasts for 2015-2016 relative to the results in March 2015. In particular, the mean inflation forecast for 2015 was lower at 2.3 percent (from 2.7 percent in March 2015) while the average annual inflation forecasts for 2016 and 2017 declined to 3.1 percent and 3.0 percent (both from 3.3 percent), respectively. Results of the June 2015 Consensus Economics inflation forecast survey for the country also showed lower inflation forecast for 2015 at 2.4 percent (from 2.7 percent in March 2015).87 The inflation forecast for 2016 was unchanged at 3.5 percent. In Q2 2015, the headline inflation slowed down to 1.7 percent from 2.5 percent in the previous quarter. Similarly, core inflation along with the three alternative measures of core inflation estimated by the BSP was lower in Q2 2015 relative to the previous quarter. Food inflation continued to ease during the quarter as most food items, particularly rice, corn, meat, milk, oils and fats, fruits, and

87

There were 18 respondents in the Consensus Economics’ survey in June 2015.

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Domestic demand conditions remain firm. Global growth remains moderate.

vegetables, posted moderate price increases due to ample domestic supply. Likewise, non-food inflation decreased due to lower prices of electricity and domestic petroleum products. Notwithstanding the soft headline growth figure, domestic private consumption remained solid. The economy grew slower than expected in Q1 at 5.2 percent y-o-y. The slowdown was attributed to weaker increases in exports (1.0 percent) and government expenditures (4.8 percent). Nevertheless, overall domestic demand remained relatively firm, with private consumption and capital formation growing by 5.4 percent and 11.8 percent, respectively. Despite the sharp contraction in public construction (-24.6 percent), growth in capital formation was supported by private investments in durable equipment, which grew by 14.3 percent. Over the next few quarters, business outlook remains positive, as reflected in the latest business sentiment survey, due to robust consumer demand during graduation and enrolment periods, harvest time and summer season. The expected increase in government infrastructure activities also boosted business confidence for the current quarter. The composite PMI has likewise remained above the 50-point expansion threshold, indicating solid domestic demand. Nevertheless, it is important for public spending to accelerate in the near term for domestic output to gain faster growth momentum. Growth in the US remains robust, while economic activity in the euro area and Japan appears to have improved. Meanwhile growth across emerging Asia, including China and India, has remained broadly subdued. On balance, economic growth across the globe is expected to remain uneven, while inflation pressures are likely to remain benign as prospects for the prices of oil and other commodities continue to be soft. With regard to central bank policy actions, a number of central banks had adjusted policy settings in Q2 2015 to support economic growth. Meanwhile, the US Federal Reserve is expected to

58

Current monetary policy settings remain appropriate in view of the emerging outlook for inflation and demand conditions.

start increasing its policy rate later this year. At the 16-17 June FOMC meeting, the US Federal Reserve kept its policy stance unchanged as expected. The statement released was largely seen as “dovish” by market. The number of FOMC members forecasting less than 2 hikes in 2015 increased from 3 to 7. The within-target inflation forecast and the underlying strength of domestic demand conditions continue to suggest that the settings of monetary policy remain appropriate for the present. Despite benign inflation readings, deflationary risks are likely to be minimal, particularly given firm demand-side conditions. At the same time, monetary conditions that are appropriately supportive of economic activity given historically low domestic interest rates and sufficient liquidity should add to firmer domestic demand especially if complemented by an increase in public spending. The NG is committed and has been undertaking steps to improve budget execution and raise government spending in infrastructure and social projects. At the same time, credit growth continues to expand at a reasonable pace amid ample domestic liquidity with the composition of credit to the productive sectors becoming more balanced. Future price pressures could also come from extended El Niño effects. Possible emergence of second-round inflation effects arising from supply-side shocks support keeping policy rates steady.

On balance, the BSP is of the view that current monetary policy settings remain appropriately calibrated. Going forward, the BSP will continue to monitor domestic and external developments to ensure that the monetary policy stance remains consistent with its price and financial stability objectives.

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SUMMARY OF MONETARY POLICY DECISIONS

EFFECTIVITY DATE LEVELS (IN %)

MONETARY POLICY DECISION RRP OVERNIGHT RP OVERNIGHT

2008 JAN 31 5.00 7.00 The Monetary Board (MB) decided to reduce by 25 basis points (bps) the BSP’s key policy interest rates to 5 percent for the overnight borrowing or reverse repurchase (RRP) facility and 7 percent for the overnight lending or repurchase (RP) facility. The interest rates on term RRPs, RPs, and special deposit accounts (SDAs) were also reduced accordingly. In its assessment of macroeconomic conditions, the MB noted that the latest inflation forecasts indicated that inflation would fall within the 4.0 percent ± 1 percentage point target range in 2008 and the 3.5 ± 1 percentage point target range in 2009.

MAR 13 5.00 7.00 The MB decided to keep the BSP’s key policy interest rates at 5 percent for the overnight borrowing or RRP facility and 7 percent for the overnight lending or RP facility. The MB also decided to implement immediately the following refinements in the SDA facility: (1) the closure of existing windows for the two-, three-, and six-month tenors; and (2) the reduction of the interest rates on the remaining tenors. The interest rates on term RRPs and RPs were also left unchanged.

APR 24 5.00 7.00 The MB kept the BSP’s key policy interest rates at 5.0 percent for the overnight borrowing or RRP facility and 7.0 percent for the overnight lending or RP facility. The interest rates on term RRPs and RPs were also left unchanged.

JUN 5 5.25 7.25 The MB decided to increase by 25 bps the BSP’s key policy interest rates to 5.25 percent for the RRP facility and 7.25 percent for RP facility as emerging baseline forecasts indicate a likely breach of the inflation target for 2008 along with indications that supply-driven pressures are beginning to feed into demand. Given the early evidence of second-round effects, the MB recognized the need to act promptly to rein in inflationary expectations. The interest rates on term RRPs, RPs, and SDAs were also increased accordingly.

JUL 17 5.75 7.75 The MB increased by 50 bps the BSP’s key policy interest rates to 5.75 percent for the overnight borrowing or RRP facility and 7.75 percent for the overnight lending or RP facility. The interest rates on term RRPs, RPs, and SDAs were also increased accordingly.

AUG 28 6.00 8.00 The MB increased by 25 bps the BSP’s key policy interest rates to 6.0 percent for the overnight borrowing or reverse repurchase (RRP) facility and 8.0 percent for the overnight lending or repurchase (RP) facility. The interest rates on term RRPs, RPs, and SDAs were also increased accordingly.

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EFFECTIVITY DATE LEVELS (IN %)

MONETARY POLICY DECISION RRP OVERNIGHT RP OVERNIGHT

2008 OCT 6 6.00 8.00 The MB kept the BSP’s key policy interest rates unchanged at 6.0 percent for RRP facility and 8.0 percent for the RP facility. The interest rates on term RRPs, RPs, and SDAs were also left unchanged.

NOV 6 6.00 8.00 The MB decided to keep the BSP’s key policy interest rates steady at 6 percent for the overnight borrowing or RRP facility and 8 percent for the overnight lending or RP facility. The interest rates on term RRPs, RPs, and SDAs were also left unchanged.

DEC 18 5.50 7.50 The MB decided to reduce the BSP’s key policy interest rates by 50 bps to 5.5 percent for the overnight borrowing or RRP facility and 7.5 percent for the overnight lending or RP facility. The interest rates on term RRPs, RPs, and SDAs were also adjusted accordingly. Latest baseline forecasts showed a decelerating inflation path over the policy horizon, with inflation falling within target by 2010. This outlook is supported by the downward shift in the balance of risks, following the easing of commodity prices, the moderation in inflation expectations, and the expected slowdown in economic activity.

2009 JAN 29 5.00 7.00 The MB decided to reduce the BSP’s key policy interest rates by another 50 bps to 5 percent for the overnight borrowing or RRP facility and 7 percent for the overnight lending or RP facility. The interest rates on term RRPs, RPs, and SDAs were also adjusted accordingly. Latest baseline forecasts showed a decelerating inflation path over the policy horizon, with inflation falling within target by 2010. The MB based its decision on the latest inflation outlook which shows inflation falling within the target range for 2009 and 2010. The Board noted that the balance of risks to inflation is tilted to the downside due to the softening prices of commodities, the slowdown in core inflation, significantly lower inflation expectations, and moderating demand.

MAR 5 4.75 6.75 The MB decided to reduce the BSP’s key policy interest rates by 25 bps to 4.75 percent for the overnight borrowing or RRP facility and 6.75 percent for the overnight lending or RP facility. The interest rates on term RRPs, RPs, and SDAs were also reduced accordingly. Given possible upside risks to inflation, notably the volatility in oil prices and in exchange rates, increases in utility rates, and potential price pressures coming from some agricultural commodities, the MB decided that a more measured adjustment of policy rates was needed.

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EFFECTIVITY DATE LEVELS (IN %)

MONETARY POLICY DECISION RRP OVERNIGHT RP OVERNIGHT

2008 APR 16 4.50 6.50 The MB reduced key policy rates by another 25 bps to 4.5 percent for the overnight borrowing or RRP facility and 6.5 percent for the overnight lending or RP facility, effective immediately. This rate cut brings the cumulative reduction in the BSP’s key policy rates to 150 bps since December last year. The current RRP rate is the lowest since 15 May 1992. Meanwhile, the interest rates on term RRPs, RPs, and SDAs were also reduced accordingly. In its assessment of macroeconomic conditions, the MB noted that the latest baseline inflation forecasts indicated a lower inflation path over the policy horizon, with average inflation expected to settle within the target ranges in 2009 and 2010. In addition, the MB considered that the risks to inflation are skewed to the downside given expectations of weaker global and domestic demand conditions and a low probability of a significant near-term recovery in commodity prices.

2009 MAY 28 4.25 6.25 The MB decided to reduce the BSP’s key policy interest rates by another 25 bps to 4.25 percent for the overnight borrowing or RRP facility and 6.25 percent for the overnight lending or RP facility. The interest rates on term RRPs, RPs, and SDAs were also reduced accordingly. Baseline forecasts indicated a lower inflation path over the policy horizon, with average inflation expected to settle within the target ranges in 2009 and 2010. In addition, the Monetary Board considered that, on balance, the risks to inflation are skewed to the downside given expectations of weaker global and domestic demand conditions and a low probability of a significant near-term recovery in commodity prices.

JUL 9 4.00 6.00 The MB decided to reduce the BSP's key policy interest rates by 25 bps to 4 percent for the overnight borrowing or RRP facility and 6 percent for the overnight lending or RP facility, effective immediately. The interest rates on term RRPs, RPs, and SDAs were reduced accordingly. This is the sixth time since December 2008 that the BSP has cut its policy interest rates.

AUG 20 OCT 1 NOV 5 DEC 17

4.00

6.00

The MB kept key policy rates unchanged at 4 percent for the RRP facility and 6 percent for the overnight lending RP facility. The decision to maintain the monetary policy stance comes after a series of policy rate cuts since December 2008 totaling 200 bps and other liquidity enhancing measures.

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EFFECTIVITY DATE LEVELS (IN %)

MONETARY POLICY DECISION RRP OVERNIGHT RP OVERNIGHT

2010

JAN 28 MAR 11 APR 22 JUN 3 JUL 15

AUG 26 OCT 7

NOV 18 DEC 29

4.00 6.00 The MB decided to keep the BSP's key policy interest rates steady at 4 percent for the RRP facility and 6 percent for the RP facility. The interest rates on term RRPs, RPs, and SDAs were also left unchanged.

2011 FEB 10 4.00 6.00 The MB decided to keep the BSP’s key policy interest rates steady at 4 percent for the overnight borrowing or RRP facility and 6 percent for the overnight lending or RP facility. The interest rates on term RRPs, RPs, and SDAs were also left unchanged.

MAR 24 4.25 6.25 The MB decided to increase by 25 bps the BSP’s key policy interest rates to 4.25 percent for the overnight borrowing or RRP facility and 6.25 percent for the overnight lending or RP facility. The interest rates on term RRPs, RPs, and SDAs were also raised accordingly. The MB’s decision was based on signs of stronger and broadening inflation pressures as well as a further upward shift in the balance of inflation risks. International food and oil prices have continued to escalate due to the combination of sustained strong global demand and supply disruptions and constraints.

MAY 5 4.50 6.50 The MB decided to increase the BSP’s key policy interest rates by another 25 bps to 4.5 percent for the overnight borrowing or RRP facility and 6.5 percent for the overnight lending or RP facility. The interest rates on term RRPs, RPs, and SDAs were also raised accordingly. Baseline inflation forecasts continue to suggest that the 3-5 percent inflation target for 2011 remains at risk, mainly as a result of expected pressures from oil prices.

JUN 16 4.50 6.50 The MB decided to keep policy rates steady at 4.5 percent for the overnight borrowing or RRP facility and 6.5 percent for the overnight lending or RP facility. At the same time, the Board decided to raise the reserve requirement on deposits and deposit substitutes of all banks and non-banks with quasi-banking functions by one percentage point effective on Friday, 24 June 2011. The MB's decision to raise the reserve requirement is a preemptive move to counter any additional inflationary pressures from excess liquidity.

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EFFECTIVITY DATE LEVELS (IN %)

MONETARY POLICY DECISION RRP OVERNIGHT RP OVERNIGHT

2011 JUL 28 4.50 6.50 The MB maintained the BSP's key policy interest rates at 4.5 percent for the overnight borrowing or RRP facility and 6.5 percent for the overnight lending or RP facility. At the same time, the Board increased anew the reserve requirement on deposits and deposit substitutes of all banks and non-banks with quasi-banking functions by one percentage point effective on 5 August 2011. The MB's decision to raise the reserve requirement anew is a forward-looking move to better manage liquidity.

SEP 8 OCT 20 DEC 1

4.50

6.50

The MB decided to keep the overnight policy rates steady. At the same time, the reserve requirement ratios were kept unchanged.

2012 JAN 19

4.25 6.25 The MB decided to reduce the BSP's key policy interest rates by 25 bps to 4.25 percent for the overnight borrowing or RRP facility and 6.25 percent for the overnight lending or RP facility. The interest rates on term RRPs, RPs, and SDAs were also reduced accordingly The MB's decision is based on its assessment that the inflation outlook remains comfortably within the target range, with expectations well-anchored and as such, allowed some scope for a reduction in policy rates to help boost economic activity and support market confidence.

MAR 1 4.00 6.00 The MB decided to reduce the BSP's key policy interest rates by another 25 bps to 4.0 percent for the overnight borrowing or RRP facility and 6.0 percent for the overnight lending or RP facility. The interest rates on term RRPs, RPs, and SDAs were also reduced accordingly. The MB is of the view that the benign inflation outlook has allowed further scope for a measured reduction in policy rates to support economic activity and reinforce confidence.

APR 19 4.00 6.00 The MB decided to keep the BSP’s key policy interest rates steady at 4 percent for the overnight borrowing or RRP facility and 6 percent for the overnight lending or RP facility. The interest rates on term RRPs, RPs, and SDAs were also left unchanged.

2012 JUN 14 4.00 6.00 The MB decided to keep the BSP’s key policy interest rates steady at 4 percent for the overnight borrowing or RRP facility and 6 percent for the overnight lending or RP facility. The interest rates on term RRPs, RPs, and SDAs were also left unchanged. The MB’s decision was based on its assessment that the inflation environment remains manageable. Baseline forecasts continue to track the lower half of the 3-5 percent target range for 2012 and 2013, while inflation expectations remain firmly anchored. At the same time, domestic macroeconomic readings have improved significantly in Q1 2012.

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EFFECTIVITY DATE LEVELS (IN %)

MONETARY POLICY DECISION RRP OVERNIGHT RP OVERNIGHT

2012 JUL 26 3.75 5.75 The MB decided to reduce the BSP’s key policy interest rates by 25 bps to 3.75 percent for the overnight borrowing or RRP facility and 5.75 percent for the overnight lending or RP facility. The interest rates on term RRPs, RPs, and SDAs were also reduced accordingly. This is the third time in 2012 that the BSP has cut its policy rates. The MB’s decision was based on its assessment that price pressures have been receding, with risks to the inflation outlook slightly skewed to the downside. Baseline forecasts indicate that inflation is likely to settle within the lower half of the 3-5 percent target for 2012 and 2013, as pressures on global commodity prices are seen to continue to abate amid weaker global growth prospects. At the same time, the MB is of the view that prospects for global economic activity are likely to remain weak.

SEP 13 3.75 5.75 The MB decided to keep the BSP’s key policy interest rates steady at 3.75 percent for the overnight borrowing or RRP facility and 5.75 percent for the overnight lending or RP facility. The interest rates on term RRPs, RPs, and SDAs were also left unchanged. The MB’s decision was based on its assessment that the inflation environment remains benign, with the risks to the inflation outlook appearing to be broadly balanced.

OCT 25 3.50 5.50 The MB decided to reduce the BSP’s key policy interest rates by 25 bps to 3.50 percent for the overnight borrowing or RRP facility and 5.50 percent for the overnight lending or RP facility. The interest rates on term RRPs, RPs, and SDAs were also reduced accordingly. This is the fourth time in 2012 that the BSP has cut its policy rates. The MB’s decision was based on its assessment that the inflation environment continued to be benign with latest baseline forecasts indicating that the future inflation path will remain within target for 2012-2014. A rate cut would also be consistent with a symmetric response to the risk of below-target inflation.

2012 DEC 13 3.50 5.50 The MB decided to keep the BSP’s key policy interest rates steady at 3.50 percent for the overnight borrowing or RRP facility and 5.50 percent for the overnight lending or RP facility. The interest rates on term RRPs, RPs, and SDAs were also left unchanged. The MB’s decision was based on its assessment that current monetary settings remained appropriate, as the cumulative 100-basis-point reduction in policy rates in 2012 continued to work its way through the economy.

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EFFECTIVITY DATE LEVELS (IN %)

MONETARY POLICY DECISION RRP OVERNIGHT RP OVERNIGHT

2013 JAN 24 3.50 5.50 The MB decided to keep the BSP’s key policy interest rates steady at 3.50 percent for the overnight borrowing or RRP facility and 5.50 percent for the overnight lending or RP facility. The interest rates on term RRPs and RPs were also maintained accordingly. The reserve requirement ratios were kept steady as well. At the same time, the MB decided to set the interest rates on the SDA facility at 3.00 percent regardless of tenor, effective immediately, consistent with the BSP’s continuing efforts to fine-tune the operation of its monetary policy tools.

MAR 14 3.50 5.50 The MB decided to keep the BSP’s key policy interest rates steady at 3.50 percent for the overnight borrowing or RRP facility and 5.50 percent for the overnight lending or RP facility. The interest rate on the RRP was also set at 3.50 percent regardless of tenor. Following its previous decision to rationalize the SDA facility in January 2013, the MB further reduced the interest rates on the SDA facility by 50 bps to 2.50 percent across all tenors effective immediately.

APR 25 3.50 5.50 The MB decided to keep the BSP’s key policy interest rates steady at 3.50 percent for the overnight borrowing or RRP facility and 5.50 percent for the overnight lending or RP facility. The interest rate on the RRP was also set at 3.50 percent regardless of tenor. Meanwhile, the SDA rate was further reduced by 50 basis points to 2.0 percent across all tenors.

JUN 13 3.50 5.50 The MB decided to keep the BSP’s key policy interest rates steady at 3.50 percent for the overnight borrowing or RRP facility and 5.50 percent for the overnight lending or RP facility. The interest rates on term RRPs, RPs, and SDA were also maintained.

JUL 25 3.50 5.50 The MB decided to keep the BSP’s key policy interest rates steady at 3.50 percent for the overnight borrowing or RRP facility and 5.50 percent for the overnight lending or RP facility. The interest rates on term RRPs, RPs, and SDA were also maintained.

SEP 12 3.50 5.50 The MB decided to keep the BSP’s key policy interest rates steady at 3.50 percent for the overnight borrowing or RRP facility and 5.50 percent for the overnight lending or RP facility. The interest rates on term RRPs, RPs, and SDA were also maintained.

OCT 24 3.50 5.50 The MB decided to keep the BSP’s key policy interest rates steady at 3.50 percent for the overnight borrowing or RRP facility and 5.50 percent for the overnight lending or RP facility. The interest rates on term RRPs, RPs, and SDA were also maintained.

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EFFECTIVITY DATE LEVELS (IN %)

MONETARY POLICY DECISION RRP OVERNIGHT RP OVERNIGHT

2013 DEC 12 3.50 5.50 The MB decided to keep the BSP’s key policy interest rates steady at 3.50 percent for the overnight borrowing or RRP facility and 5.50 percent for the overnight lending or RP facility. The interest rates on term RRPs, RPs, and SDA were also maintained.

2014 FEB 6 3.50 5.50 The MB decided to keep the BSP’s key policy interest rates steady at 3.50 percent for the overnight borrowing or RRP facility and 5.50 percent for the overnight lending or RP facility. The interest rates on term RRPs, RPs, and SDA were also maintained.

MAR 27 3.50 5.50 The MB decided to keep the BSP’s key policy interest rates steady at 3.50 percent for the overnight borrowing or RRP facility and 5.50 percent for the overnight lending or RP facility. The interest rates on term RRPs, RPs, and SDA were also maintained. Meanwhile, the MB decided to increase the reserve requirement by one percentage point effective on 11 April 2014.

MAY 8 3.50 5.50 The MB decided to keep the BSP's key policy interest rates steady at 3.50 percent for the overnight borrowing or RRP facility and 5.50 percent for the overnight lending or RP facility. The interest rates on term RRPs, RPs, and SDA were also maintained. Meanwhile, the MB decided to increase the reserve requirements for U/KBs and TBs by a further one percentage point effective on 30 May 2014.

JUN 19 3.50 5.50 The MB decided to keep the BSP's key policy interest rates steady at 3.50 percent for the overnight borrowing or RRP facility and 5.50 percent for the overnight lending or RP facility. The interest rates on term RRPs and RPs were also maintained. The reserve requirement ratios were left unchanged as well. Meanwhile, the MB decided to raise the interest rate on the SDA facility by 25 basis points from 2.0 percent to 2.25 percent across all tenors effective immediately.

JUL 31 3.75 5.75 The MB decided to increase the BSP's key policy rates by 25 bps to 3.75 percent for the overnight borrowing or RRP facility and 5.75 percent for the overnight lending or RP facility. The interest rates on term RRPs and RPs were also raised accordingly. The rate on special deposit accounts (SDA) was left unchanged. Meanwhile, the reserve requirement ratios were also kept steady.

SEP 11 4.00 6.00 The MB decided to increase the BSP's key policy rates by 25 bps to 4.0 percent for the overnight borrowing or RRP facility and 6.0 percent for the overnight lending or RP facility. The interest rates on term RRPs, RPs, and SDA were also raised accordingly. Meanwhile, the reserve requirement ratios were left unchanged.

67

EFFECTIVITY DATE LEVELS (IN %)

MONETARY POLICY DECISION RRP OVERNIGHT RP OVERNIGHT

2014 OCT 23 4.00 6.00 The MB decided to maintain the BSP’s key policy interest rates at 4.0 percent for the overnight borrowing or reverse repurchase (RRP) facility and 6.0 percent for the overnight lending or repurchase (RP) facility. The interest rates on term RRPs, RPs, and special deposit accounts were also kept steady. The reserve requirement ratios were left unchanged as well.

DEC 11 4.00 6.00 The MB decided to maintain the BSP’s key policy interest rates at 4.0 percent for the overnight borrowing or reverse repurchase (RRP) facility and 6.0 percent for the overnight lending or repurchase (RP) facility. The interest rates on term RRPs, RPs, and special deposit accounts were also kept steady. The reserve requirement ratios were left unchanged as well.

2015 FEB 12 MAR 26 MAY 14 JUN 25

4.00 6.00 The MB decided to maintain the BSP’s key policy interest rates at 4.0 percent for the overnight borrowing or reverse repurchase (RRP) facility and 6.0 percent for the overnight lending or repurchase (RP) facility. The interest rates on term RRPs, RPs, and special deposit accounts were also kept steady. The reserve requirement ratios were left unchanged as well.

The BSP Inflation Report is published every quarter by the Bangko Sentral ng Pilipinas. The report is available as a complete document in pdf format, together with other general information about inflation targeting and the monetary policy of the BSP, on the BSP’s website:

www.bsp.gov.ph/monetary/inflation.asp If you wish to receive an electronic copy of the latest BSP Inflation Report, please send an e-mail to bspmail@bsp.gov.ph. The BSP also welcomes feedback from readers on the contents of the Inflation Report as well as suggestions on how to improve the presentation. Please send comments and suggestions to the following addresses:

By post: BSP Inflation Report

c/o Department of Economic Research Bangko Sentral ng Pilipinas

A. Mabini Street, Malate, Manila Philippines 1004

By e-mail: bspmail@bsp.gov.ph