BSP hikes inflation forecast for 2011

MANILA, Philippines – The Bangko Sentral ng Pilipinas (BSP) raised upwards its inflation forecast for next year due to the continued stronger-than-expected gross domestic product (GDP) growth in the first half of the year, higher oil prices, petitions for electricity rate hike, the imposition of the 12-percent value added tax on toll as well as the impending MRT-LRT fare hike.

BSP Deputy Governor Diwa Guinigundo said in an interview with reporters that the central bank decided to raise the inflation forecast next year to 3.25 percent instead of three percent set last July 15 but has maintained this year’s forecast at four percent.

Guinigundo attributed the “very slight” adjustment in next year’s inflation forecast to higher oil prices, stronger-than-expected GDP growth in the first half, and stronger liquidity growth.

For 2012, the BSP sees inflation averaging 2.97 percent.

He pointed out that the inflation forecasts for 2010, 2011, and 2012 would fall within the targets set by the BSP as the increase in capital formation would mute or moderate any additional price pressure.

For his part, BSP Governor Amando M. Tetangco Jr. said the stronger-than-expected GDP growth of 7.9 percent in the second quarter and the revised growth of 7.8 percent in the first quarter would not result to a significant increase in 2010 and 2011.

“The higher than expected GDP growth is not expected to cause a significant increase in inflation in 2010 and 2011. Our forecasts still indicate a well within target inflation for these two years,” Tetangco stressed.

The BSP has set an inflation target of 3.5 percent to 5.5 percent this year as well as three percent to five percent for 2011 and 2012.

The BSP chief said inflation profile remained favorable as shown by current inflation trends, the inflation outlook, and the public’s expectations about inflation.

He explained that the policy-setting body noted that favorable inflation dynamics provide the flexibility to keep interest rates steady.

“The BSP’s effort to promote low and stable inflation are therefore consistent with the maintenance of supportive conditions for domestic economic growth amidst lingering uncertainties surrounding global economic growth prospects,” the BSP chief stressed.

He added that upside risks to inflation outlook included the continued stronger-than-expected expansion in domestic demand and petitions for electricity rate adjustments while downside risks include the prospect of a slower-than-expected growth in the global economy.

“Looking ahead, the board will continue to carefully assess these risks to ensure that monetary policy settings remain well calibrated,” Tetangco said.

Latest data from the National Statistics Office (NSO) showed that inflation was steady at 3.9 percent in July bringing the average inflation rate at 4.2 percent in the first seven months of the year.

On the other hand, statistics showed that domestic liquidity or M3 grew by 10.3 percent to P3.972 trillion as of end-June this year or P373 billion higher than the level of P3.6 trillion as of end-June last year. M3 is the amount of money circulating in the domestic economy. At a time when the economy is booming and money supply is expanding rapidly, the central bank would normally step in to mop-up in order to ensure that inflation would not surge. –Lawrence Agcaoili (The Philippine Star)