Inflation to drop this year - Tetangco

Bangko Sentral ng Pilipinas Governor Amando M. Tetangco Jr. said yesterday that inflation would head downwards throughout 2009, giving monetary officials the room to ensure that there is enough liquidity in the system to fuel growth.

As the prices of basic commodities stabilized with the drop in the prices of fuel in the world market, Tetangco’s statement hinted at further easing when the Monetary Board conducts its policy meeting this week.

The BSP was widely expected to approve a further easing in monetary policies on Thursday, with some observers pegging a cut of 50 basis points in the overnight borrowing and lending rate.

Tetangco said the BSP is confident that the inflation rate trajectory would head downwards this year, indicating that monetary officials are not expecting surges this year, provided that oil prices remained stable.

According to Tetangco, the slowdown in the global economy would also ensure that inflationary pressures were kept in check since consumption would not be as exuberant as in the past.

Tetangco said the BSP’s concern now, when contemplating its monetary stance, would be to ensure that adequate liquidity is available in the market to prevent a credit crunch at a time when the economy should be primed.

“Our approach to the liquidity question is to make sure there is enough and the downtrend in inflation rate will allow us to do that, especially if there are some concerns over the conditions of some of the sectors of the economy,” Tetangco told reporters yesterday. “We just want to make sure there is liquidity.”

Tetangco said the BSP intends to seek opportunities for policy easing this year as the national average inflation rate fell to eight percent in December, dropping significantly faster than they expected.

The December inflation rate rounded up the whole-year average inflation rate to 9.3 percent as prices went swinging upwards in 2008 and peaked at a 17-year high of 12.5 percent in August.

Propelled by violent surges in oil prices in 2008, the prices of basic commodities soared, aggravated by an unusual increase in the prices of basic food commodities particularly rice.

After hitting the August peak, however, the prices of basic commodities softened rapidly, reflecting a similarly rapid decline in world oil prices which dropped back to around $30 per barrel towards the end of the year.

The BSP expects the inflation rate to average at 5.5 percent this year, even lower than its previous projected average of six to nine percent.

Tetangco also pointed out that the core inflation is coming down in earnest, indicating that second-round, demand-side pressures are also easing.

The BSP already cut its policy rates by 50 basis points in December but Tetangco’s statement indicated that further easing was on the table this year.

The BSP cut its key policy rates by 50 basis points, lowering its overnight borrowing rates to 5.5 percent and its overnight lending rates to 7.5 percent in an effort to stimulate the economy.

The market is widely expecting at least a 25-basis point cut but December’s monetary policy easing is more aggressive than expected, especially after monetary officials raised concerns over lingering inflation fears.

But the BSP needs to support efforts to encourage economic activities to prevent the economy from stalling in the next two years. With inflationary pressures receding, monetary officials now had the room to do just this.

According to Tetangco, inflation is expected to fall within target by 2010 when the government pegged its official target inflation range at 3.5 percent to 5.5 percent.

“This outlook is supported by the downward shift in the balance of risks following the easing of commodity prices, the moderation in inflation expectations and the expected slowdown in economic activity,” Tetangco said.

On the other hand, the BSP’s policy cut also came after the dramatic cut in US interest rates which the US Federal Open Market Committee reduced to as low as zero percent when it conducted its own policy meeting two days before the BSP.