April inflation seen at 2.9%-3.1%

The Bangko Sentral ng Pilipinas (BSP) said yesterday it expects the inflation rate in April to be in the range of 2.9 to 3.1 percent.

Despite the volatility in the prices of oil products right before the US-Iraq war and the depreciation of the peso, the BSP said prices of basic commodities have remained stable, especially food prices.

BSP Deputy Governor Amando Tetangco Jr. said the April inflation supported the neutral monetary stance of the BSP since there was no inflationary pressure despite the disruption caused by the war.

Tetangco said the 2.9 to 3.1 percent range for April was still well below the government’s four to five percent target inflation rate for the year.

According to the BSP, supply side factors mainly of food items and fuel products, continued to be the major sources of "transitory inflationary pressures" but were not enough to warrant any adjustment in the prevailing monetary policies.

The BSP said the absence of broad-based price movements also indicated a lack of generalized demand pressures on inflation.

‘While there are some improvements in domestic demand such as the observed recovery in bank lending and some gains in manufacturing output, the overall demand conditions remain consistent with a generally benign inflation setting," the BSP said. "Current price trends, therefore, support the BSP’s expectations of a generally subdued inflation environment."

According to the BSP, there was also a weakening in the inflationary risks related to the El Niño weather phenomenon which was originally projected to affect domestic production and, therefore, reduce domestic supply for basic agricultural products.

The BSP, however, has already taken drastic steps to keep inflation in check by protecting the peso from the wild gyrations that it went through in the last three weeks when the peso plummeted to record lows.

The BSP approved two measures to mop up liquidity to head off inflationary pressures as war broke out between Iraq and the US, removing an estimated P14 billion from the system by raising the liquidity reserve requirement and removing the three-tier interest structure on bank placements with the BSP.

The Monetary Board also increased the liquidity reserve requirement of universal banks and commercial banks to eight percent to further mop up liquidity from the system.

The last time the MB increased the liquidity reserve requirement was in August 2001 when the peso was under heavy speculative attacks. That year, the MB also sanctioned nine banks for speculation.

According to the BSP, the move was a "pre-emptive response to inflationary risks" spawned by the volatility of the peso against the dollar.