BSP sees inflation rising to 4.2% this year

MANILA, Philippines - The Bangko Sentral ng Pilipinas (BSP) sees average inflation rising to as high as 4.2 percent this year if the upside risks to consumer prices materialize.

BSP Governor Amando M. Tetangco Jr. said in a press conference that inflation could average between 3.8 percent and 4.2 percent instead of the revised forecast of 3.6 percent but would still fall within the central bank target of three percent to five percent this year until 2014.

“What we are looking at is that if the upside risk materializes, the 3.6 percent might be 3.8 percent to 4.2 percent but still within the midpoint of the target range for 2011,” Tetangco stressed.

The BSP has set an inflation target of three percent to five percent between 2011 and 2014 after achieving its inflation target of 3.5 percent to 5.5 percent last year. Inflation last year averaged 3.8 percent from 3.2 percent in 2009.

“The inflation environment in the Philippines continues to be favorable. For 2010 the average inflation rate was 3.8 percent and for 2011 our baseline forecast is an average of 3.6 percent and this is expected to go down to three percent in 2012.

Now the forecast for this year and next year already incorporated some assumptions of a possible price increases in things like toll fees, petroleum prices, rice prices and other prices,” Tetangco added.

If the prices of certain items turn out to be higher than expected, he pointed out that inflation average this year would range between 3.8 percent and 4.2 BSP

percent but would still fall within the BSP target.

“Now if the increase in prices of certain items turn out to be higher and what we call the upside risks materialize then we may see some increase in the projected average but this would still fall well within the inflation target for the year,” the BSP chief explained.

Tetangco, who was given a second six-year term by President Aquino when his first term expires this July, said monetary authorities would continue to improve its macroeconomic models and sharpen its monetary tools to be able to forecast inflation better.

BSP Assistant Governor Ma. Cyd Tuano Amador identified the upside risks to inflation as potential upward pressures to commodity prices given sustained demand from emerging markets as well as demand-induced price pressures from a stronger-than-expected domestic economy.

She also cited the cost-side pressures from the likelihood of further adjustments in domestic rice prices and electricity charges as well as the potential price impact of weather disturbance on agricultural production.

On the other hand, downside risks include the sustained appreciation of the peso against the US dollar as well as uncertainty over the pace of global economic recovery particularly from advanced economies that would temper commodity price increases.

“The BSP’s assessment of current price trends and risks to future inflation suggests that the balance of risks to inflation outlook is tilted to the upside,” she stressed.

For his part, BSP Deputy Governor Diwa Guinigundo said in an interview with reporters on the sidelines of the press conference of the Inflation Report for the fourth quarter of 2010 that authorities are still fine tuning the inflation forecast that currently stands at 3.6 percent for this year and 3.0 percent for next year.

Guinigundo said the BSP would release the revised forecasts on February 10 after the scheduled first policy setting meeting of the Monetary Board this year.

With the benign and stable inflation outlook, monetary authorities said the BSP has enough room to keep its key policy rates at record levels. The BSP’s Monetary Board slashed the country’s key policy rates by 200 basis points between December 2008 and July 2009 to cushion the impact of the global financial crisis on the domestic economy.

This brought the overnight borrowing rate to a record low of 4.0 percent and the overnight lending rate at 6.0 percent.

“So, if the inflation forecast is within the inflation target, then that gives us some comfort but at the same time, we also have to look at other related indicators including the inflation expectations. As I mentioned earlier, inflation expectations are relatively well-anchored at this point so there’s really no pressure at this time to change the stance in the monetary policy,” Tetangco said.