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BSP commits to 2-4% inflation target this year

Lawrence Agcaoili (The Philippine Star) - January 31, 2016 - 9:00am

MANILA, Philippines - The Bangko Sentral ng Pilipinas (BSP) vowed to ensure that monetary policy would remain consistent with the economy’s momentum for sustained non-inflationary growth.

In an open letter to President Aquino, BSP Governor Amando Tetangco Jr. said the central bank remains strongly committed to achieving the inflation targets over the medium term and stands ready to respond to any emerging risks that could threaten the attainment of these targets.

“We would like to assure the President and the Filipino people the BSP is closely monitoring these developments that could pose risks to the inflation outlook,” he said in the letter dated Jan. 28.

The country’s inflation eased to a 20-year low of 1.4 percent last year from 4.1 percent in 2014, missing the BSP target of between two percent and four percent.

Tetangco pointed out price movements were more subdued in 2015 than initially expected when the inflation target was set in 2012.

He added headline inflation eased considerably last year on account mainly of slower increases in food prices due to the adequate supply of food commodities, including rice.

Furthermore, he said electricity rates and oil prices dropped, leading to some dampening on inflation.

“These developments reflected the sustained decline in international crude oil prices due mainly to the glut in global supply, as the demand for oil also remained weak amid soft growth prospects across the globe. Taken together, these factors contributed to slower price increases in 2015,” he said.

On the other hand, the country’s gross domestic product (GDP) growth slowed down to 5.8 percent last year from 6.1 percent in 2014 amid the weak global demand and lack of government spending.

The sustained economic growth amid the benign inflation environment allowed the BSP’s Monetary Board to keep interest rates unchanged for 10 straight policy-setting meetings since October 2014.

“In its communication to the public, the BSP had made it clear that domestic price movements in 2015 were being driven largely by transitory supply-side factors that were outside the influence of monetary policy,” the BSP chief said.

The BSP noted that domestic spending was robust last year supported by favorable business and consumer sentiment as well as by ample domestic liquidity and credit.

He also added there were no firm indications of second-round effects such as a slowdown in economic activity or petitions for wage and transport fare adjustments that would have reinforced the decline in inflation that should warrant monetary action from the BSP.

For this year, Tetangco said inflation is likely to rise gradually to be within the two percent to four percent target for this year and next year.

“Improved demand from recovering economies could spark a rally in international oil prices. Potential upside risks to the outlook are linked mainly to the impact of El Niño conditions and recent weather disturbances on food prices and utility rates as well as pending petitions for power rate adjustments. Downside risks, meanwhile, could come from slower-than-expected global economic activity,” he added.

To ensure accountability in cases where the BSP fails to achieve the inflation target, the BSP Governor issues an Open Letter to the President outlining the reasons why actual inflation did not fall within the target, along with the steps that would be taken to bring inflation towards the target.

The last time the BSP sent an Open Letter was in 2009 when Tetangco explained to former President Arroyo why inflation kicked up to 9.3 percent in 2008 exceeding the full-year target of three percent to five percent due to the global financial crisis.

 

ACIRC BANGKO SENTRAL BSP EL NI GOVERNOR AMANDO TETANGCO JR. INFLATION MONETARY BOARD OPEN LETTER PERCENT TETANGCO YEAR
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