BSP sees inflation this year at 7.3%-7.4%

The Bangko Sentral ng Pilipinas (BSP) said yesterday the average inflation rate would slow down to the original projected rate of about 7.3 percent to 7.4 percent this year if the value-added tax (VAT) is not implemented for the remainder of the year.

Earlier projections indicated that with the removal of the VAT exemptions of industries that used to be exempted, the national average inflation rate would go up to 7.9 percent to 8.6 percent for the whole of 2005.

The full implementation of the expanded VAT law, on the other hand, was expected to add as much as two percentage points to the national average inflation rate in 2006 before the inflationary impact is neutralized by 2007.

According to BSP Assistant Governor Diwa Guinigundo, the VAT was calculated to have an impact on inflation rate to the extent of 50 basis points this year, equivalent to around 0.5 percentage points.

"If the portions of the law that became effective this year are not implemented, then this impact will not materialize," Guinigundo said. "We go back to the pre-VAT projection."

However, Guinigundo pointed out that lower inflation would not necessarily mean better growth prospects or improving economic outlook for individual households.

"From the macro-economic perspective, the VAT is a necessary pain right now and despite the impact on inflation, the long-term effect is positive," Guinigundo said.