Filipinos expect inflation to remain low—BSP

MANILA, Philippines – The Bangko Sentral ng Pilipinas said Filipinos expected consumer prices to remain relatively stable over the short term, giving it elbow room to maintain low interest rates.

BSP Deputy Governor Diwa Guinigundo said recent surveys done by the central bank among private firms, economists, and consumers showed that people expected inflation to be benign. He said a “well-anchored” inflation expectation was beneficial, noting that public’s expectations tend to be self-fulfilling.

If consumers anticipate prices to shoot up in the future, chances are they would increase current purchases. But by doing so, aggregate demand for goods would rise, thus creating pressure that will actually accelerate inflation.

But Guinigundo said there was consensus that the rise in consumer prices would be mild. Such expectations would help to actually temper inflation.

According to the minutes of the most recent policy rate-setting meeting by the central bank’s Monetary Board last month, which was released to reporters late Thursday afternoon, surveys showed that businesses and individuals expect average inflation for 2009 and 2010 to settle within the official targets.

The government wants to limit inflation to a range of 2.5 to 4.5 percent this year, and from 3.5 to 5.5 percent in 2010.

Last May, the annual inflation rate slowed to 3.3 percent, bringing down the average for the first five months to 5.7 percent. The BSP said inflation would further decelerate until the average for the year fall within the official target. Specifically, the BSP expects inflation to average 3.4 percent this year.

The BSP said inflation may bottom in the third quarter due to base effects. Since prices spiraled in the third quarter of 2008, hitting a 17-year high of 12.6 percent in August, there was very little room for a further increase in prices in the third quarter this year.

Monetary officials said moderate inflation would allow it to maintain, if not further reduce, interest rates.

The BSP has slashed its key policy rates by a total of 175 basis points since December, bringing the overnight borrowing and lending rates to 4.25 and 6.25 percent.–Michelle Remo, Philippine Daily Inquirer