DBCC retains 2-4% inflation target for 2016

MANILA, Philippines – Economic managers are sticking to the inflation target of between two and four percent over the next two years, the Bangko Sentral ng Pilipinas (BSP) reported yesterday.

The BSP said the Development Budget Coordination Committee (DBCC) issued a resolution last Tuesday maintaining the current inflation target at two to four percent for 2016 to 2018 in line with the inflation targeting approach to the conduct of monetary policy.

It explained the government’s inflation target is defined in terms of the average year-on-year change in the consumer price index (CPI) over the calendar year.

“The three percent ± one percentage point fixed annual target for 2016 to 2018 set by the government remains suitable to the Philippine economy and is consistent with the country’s evolving price dynamics and sustained economic growth objectives,” the BSP said.

According to the central bank, the current low inflation environment could be sustained over the medium term as underlying structural inflation dynamics are favorable with the improved ability of the domestic economy to accommodate supply shocks.

“In particular, compared to pre-inflation targeting period, headline inflation has been observed to return faster to the target while the influence of the foreign exchange rate has diminished,” the BSP added.

Furthermore, it said structural reforms in the economy could generate further productivity gains and raise the economy’s growth potential, allowing the economy to grow at a respectable rate while maintaining prices stable.

The central bank believes greater transparency in the conduct of monetary policy also enabled the firmer anchoring of inflation expectations to the inflation target.

“The announcement of the target is in line with the BSP’s commitment to greater transparency and accountability in the conduct of monetary policy,” it said.

Going forward, the BSP would continue to ensure the monetary policy stance remains appropriate, consistent with its primary mandate of safeguarding price stability conducive to a balanced and sustainable economic growth.

The benign inflation environment and robust domestic demand has allowed the BSP to keep interest rates steady for 10 straight policy setting meetings since October 2014.

The BSP sees inflation in December ranging between 1.1 and 1.9 percent as the increase in LPG prices, upward electricity rate adjustment, transitory increase in food prices due to Typhoon Nona and the weaker peso could provide upward inflation pressures.

Inflation kicked up to 1.1 percent in November from a record low of 0.4 percent in October due to a spike in food prices. This brought the average inflation to 1.4 percent in the first 11 months, way below the BSP target of two percent to four percent for this year.

The Monetary Board has further retained its inflation forecast to 1.4 percent as the rise in consumer prices bottomed out in October at 0.4 percent due softening of oil prices as well as other food prices.

However, monetary authorities adjusted its inflation forecasts to 2.4 percent instead of 2.3 percent for 2016 and to 3.2 percent instead of 2.9 percent for 2017 due to the higher inflation in November, the impact of the weakening pesos against the US dollar, and the increasing price of key commodities due to weather disturbances.