BSP sees inflation still within target this year

Manila, Philippines - Monetary authorities said inflation would likely breach the higher end of the three to five percent target set by the Bangko Sentral ng Pilipinas (BSP) in some months this year despite the twin 25-basis point rate hike imposed so far by the central bank.

BSP Assistant Governor Cyd Tuano-Amador told reporters that inflation could exceed five percent in some months this year but average inflation would still fall within the target set by the BSP.

“Inflation will be higher than five percent in some months. But based on our analysis for the whole year, it would be within three percent to five percent this year unless there will be shocks like those that come from oil prices,” Amador stressed.

Latest data released by the National Statistics Office (NSO) showed inflation kicked up to a one-year high of 4.5 percent in April, bringing the average inflation to 4.2 percent in the first four months of the year from 4.3 percent in the same period last year.

The BSP’s Monetary Board raised interest rates by 25 bps last March 24 and by another 25 bpss last May 5 as a preemptive move to keep inflation expectations well anchored amid the rising global oil prices as well as second round effects including transport fare hike, higher wages, among others.

This brought the overnight borrowing rate to 4.50 percent and the overnight lending rate to 6.50 percent. The central bank slashed key policy rates by 200 bps between December 2008 and July 2009 to cushion the impact of the global financial crisis on the domestic economy.

Authorities managed to keep interest rates steady at record lows of four percent for the overnight borrowing rate and six percent for the overnight lending rate for 20 straight months dating back in July 2009 due to the benign inflation outlook.

Without the rate hike, the BSP said inflation expectations for 2011 would have gone up to 5.6 percent and for 2012, would have increased to 4.2 percent.

With the rate hike, inflation expectations for 2011 and 2012 is now back to within the target of 3-5 percent set for 2011 until 2014.

Dennis Lapid, acting deputy director of the BSP’s Department of Economic Research, said in the briefing for the inflation report for the first quarter that this year’s inflation target could be at risk given elevated price pressures.

“The BSP’s assessment of current price trends and risks to future inflation suggests that the balance of risks to the inflation outlook is tilted slightly to the upside,” Lapid said.

He explained that upside risks to inflation include the tightening of global commodity markets against a backdrop of structurally strong demand and supply constraints, impact of geopolitical risks on oil prices, and impact of adverse weather conditions on food production.

Other factors, he said, include additional petitions for adjustments in electricity prices, higher-than-anticipated wage increases, rising inflation sentiments, and stronger-than-expected domestic economic growth. 

On the other hand, he added that downside risks to inflation include slower-than-expected economic growth in the global economy and the sustained appreciation of the peso against the US dollar that could help reduce the cost of imported goods and services.

Lapid presented the latest fan chart of the BSP wherein inflation was expected to breach six percent in the third quarter before easing in the fourth quarter due to elevated price pressures.

He pointed out that the inflation report from the latest report reflects mainly the impact of the higher-than-projected inflation outturns in the first quarter due to the surge in the world oil prices, the increase in transport fares, and higher food prices.

However, Amador quickly clarified that the latest fan chart did not factor in the 50 basis point rate hike imposed by the BSP last March and early May.

According to her, the BSP is prepared to take further policy action if needed to keep inflation expectations well anchored amid the continued build up in price pressures.

“The BSP is ready to take further action if inflation continues to be beyond our comfort zone; we remain very strongly committed to that,” she added.