Inflation in the Consumer Price Index (CPI) averaged 5.6 percent for the period 2004-2010 with a declining trend, averaging 3.8 percent in 2010. From 2004 to 2006, much of the inflation pressure was due to supply shocks, including increases in global oil prices that led to higher domestic pump prices, minimum wage adjustments throughout the country, hikes in transport fares and utility charges, and weather-related disturbances. Meanwhile, with good weather conditions and a relatively firm peso, inflation declined to 2.8 percent in 2007, the lowest annual average in 21 years.
The steady decline in inflation was interrupted by sharp increases in world commodity prices, which fed into a 9.3-percent inflation rate in 2008. Monetary authorities responded by raising the policy rate by 100 basis points for June-August 2008. By late 2008, the balance of risks to the inflation outlook had shifted downwards following the easing of commodity prices, the moderation in inflation expectations, and the slowdown in economic activity. These developments provided latitude for monetary easing to support growth amidst the global financial crisis in 2008-2009, including the 200-basis point reduction in policy interest rates. Monetary authorities also adopted other crisis intervention measures at the height of the global financial crisis and smoothly disengaged from these when financial conditions began to normalize.4
The monetary policy stance remains supportive of noninflationary growth. Credit remains adequate in supporting economic activity. This is evident in the steady uptrend in bank lending and smooth functioning of domestic financial markets. Low and stable inflation has also contributed to lower costs of funds in the market, supporting investment and consumption expenditures by firms and households.
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4 In addition to the 200-basis point reduction in the BSP policy rate, other measures included the: (a) opening of US dollar repo facility; (b) increase in rediscounting budget from PhP20 billion to PhP60 billion; (c) the reduction in banks' reserve requirement by two percentage points; and (d) some easing of the loan value and access criteria to the rediscounting facility. The BSP later disengaged from these measures. It aligned the peso rediscount rate to the BSP's policy rate, restored the peso rediscounting budget to its precrisis level of PhP20 billion and restored the loan value and the past-due loan ratio requirements for banks availing themselves of the rediscounting facility to their precrisis settings.