Tetangco rules out possibility of deflation

MANILA, Philippines - Bangko Sentral ng Pilipinas (BSP) Governor Amando M. Tetangco Jr. ruled out the possibility of a deflation, saying that the economy is still packing some growth momentum to prevent a spiral that could lead to economic depression.

Deflation is a persistent decrease in the general price level of goods and services. Although consumers generally want prices to decline to make goods more affordable, it is normally accompanied by periods of economic decline.

But Tetangco said the simulations of the Bangko Sentral ng Pilipinas (BSP) showed no indication that the country would go into deflation although he did warn there is a possibility of a negative feedback loop stemming from rising unemployment.

“The economy is still growing right along its historic growth trajectory,” Tetangco said. “As long as the economy is expanding, even if it is at a slower pace, there is no threat of deflation.”

According to Tetangco, inflation would ease up this year and BSP projections indicate that the rate could even go down to as low as 1.3 percent sometime in the third quarter of 2009.

But Tetangco said a large part of the trend also had to do with base effects since inflation went up to double-digit levels last year so that when compared to price increases this year, the rate would appear unusually low.

But by 2010, Tetangco said the BSP is projecting a slight increase in the inflation rate although the projected level is still within the official inflation target of 3.5 percent to 5.5 percent.

The BSP said that the inflation rate is expected to drop steadily in the first three quarters of the year before going up slightly towards the end of the year.

Tetangco said the steady decline in the inflation rate is expected to bring the average rate down to 3.9 percent, well within the official target inflation of 2.5 to 4.5 percent this year.

Tetangco said the BSP’s 2009 and 2010 outlook considered that food and non-food prices have declined dramatically, leading to actual drops in commodity process.

Guinigundo said the BSP also believed that second round effects have run their course and this would lead to inflation averaging at 4.7 percent in 2010, also within the 3.5 to 5.5 percent.

The BSP said survey indicated that inflation rate would average at 6.8 percent in the first quarter and drop down to 4.1 percent in the second quarter of the year.

The BSP also reported that based on its initial monthly survey among private sector economists and analysts, expected inflation for 2009 declined from 6.5 percent to 4.5 percent as of December 2008, and from 9.2 percent to 6.8 percent for Q1 2009.

The BSP said this was consistent with the results of the fourth quarter 2008 Consumer Expectations Survey (CES) and Business Expectations Survey (BES), showing lower inflation expectations and a smaller proportion of respondents anticipating an increase in inflation.

The BSP said the results of the January 2009 Asia Pacific (AP) Consensus Survey also showed lower inflation expectations, with average inflation for 2009 now forecasted at 4.9 percent from 5.7 percent in the December 2008 survey.

The relatively low inflation rate is projected by the BSP despite the fact that domestic liquidity is expected to grow by 14 percent, higher than originally seen as the central bank continued to ease monetary policy to stimulate growth.