BSP ups 2005 inflation target

The Bangko Sentral ng Pilipinas (BSP) raised yesterday its forecast for inflation this year and said a possible national wage rise and a sharp increase in transport fares could prompt a policy response.

High energy costs, and the possible wage and transport rise meant average prices in 2005 are expected to be seven percent to 7.3 percent higher than last year, up from an earlier forecast of 6.8 percent to seven percent, Assistant BSP Governor Diwa Guinigundo said.

The inflation rate in 2004 was six percent.

"The main concern for the monetary policy is the impact on wages and price setting," he said, adding that "if the petition for wage and transport hike is granted, it constitutes second-round effects that could require monetary policy adjustment."

Guinigundo, however, said that policy action would be considered only if there is strong evidence of demand-side effects arising from supply shocks particularly in terms of adjustments in nominal wage rates in excess of losses in purchasing power.

"Right now, we do not see this pressure yet," Guinigundo said. "But we don’t know what the outcome of negotiations will be on the wage issue and the transport fare increase issue."

"But there is evidence that cost-side influences may already be feeding into inflation expectations," Guinigundo said.

This means that since people expect costs to rise following the increases in oil and petroleum products, there would be a corresponding increase in the prices of basic commodities.

Guinigundo said the BSP’s revised inflation forecast assumed a 36-centavo hike in the tariff rate of state-owned National Power Corp. (Napocor), a six percent wage increase, and Dubai crude cost of $44.98 per barrel this year.

Regulators last week allowed Napocor to hike its average power rates by 42 percent, or 1.0354 pesos per kilowatt hour – almost three times the increase the central bank had assumed.

The BSP forecast inflation would slow to 4.4 to 4.9 percent in 2006, even though it expected oil prices to remain high and for workers to get a five percent wage rise next year.

Earlier, BSP Deputy Governor Amando Tetangco said inflation in the year through April was expected to be between 8.1 and 8.6 percent, due to higher prices of crude oil and rice.

Inflation was steady at 8.5 percent in February and March. The April data is due on May 5.

Both officials said they expect year-through inflation to slow to 4.5 to 5 percent in the last quarter of the year, mainly due to a high base in the last three months of 2004.

To curb rising inflation, the BSP in early April raised its overnight interest rates by 25 basis points, its first increased in nearly five years.

That brought the overnight borrowing rate to seven percent and lending rate to 9.25 percent.