Inflation forecasts tweaked; rates steady

THE MONETARY BOARD kept key interest rates steady during its first policy meeting for the year but adjusted its 2014 and 2015 inflation forecasts.

The Bangko Sentral ng Pilipinas’ (BSP) overnight borrowing and lending rates were maintained 3.5% and 5.5%, respectively, for a 10th straight meeting, with monetary authorities contending that inflation remained manageable.

“While inflation has risen slightly due mainly to the recent increase in food prices on account of adverse weather conditions, latest baseline forecasts continue to indicate that the future inflation path is likely to stay within the target ranges,” central bank Governor Amando M. Tetangco, Jr. told reporters yesterday.

The inflation forecast for this year was trimmed to 4.3% from 4.5% while that for 2015 was hiked to 3.3% from 3.2%.

The BSP’s target ranges for this year and the next are 3-5% and 2-4%, respectively.

“The lower inflation [outlook] for 2014 is because of the lower January 2014 inflation result and the delay of the implementation of the power rate hike of Meralco (Manila Electric Co.)…,” central bank Deputy Governor Diwa C. Guinigundo explained.

The 2015 forecast is slightly higher because the delayed electricity rate hike will likely spill over to next year, he added.

The Supreme Court has halted a P4.15/kilowatt-hour increase Meralco planned to impose in stages starting last December. Justices are currently hearing a complaint filed by party-list legislators and consumer groups.

Mr. Guinigundo said that once implemented, the power rate hike would result in a 15 basis point increase in the 2014 inflation forecast. The 2015 projection, meanwhile, would be hiked by seven basis points.

Asked if the peso’s recent weakness was a threat to inflation, he replied: “The exchange rate is also a matter of concern but the pass through has gone down in the past years, as a result of the changes the implemented by the BSP on foreign exchange liberalization.”

Mr. Tetangco, meanwhile, said: “The MB also noted that while the global economy has become more challenging because of heightened financial market uncertainty following monetary policy adjustments in the US and generalized concerns about the sustainability of growth in emerging economies, domestic economic activity is likely to stay firm.”

Mr. Guinigundo said the 6.5-7.5% economic growth target for this year remained achievable “as the potential economy has gone up, supported by various infrastructure projects, among others.”

Mr. Tetangco said, “Sound fundamentals such as buoyant demand, strong fiscal and external positions as well as favorable consumer and business sentiment would support the economy.”

The Philippine economy grew by an above-target 7.2% last year despite natural disasters that hit in the last three months of the year. The result exceeded the government’s 6-7% goal. Inflation, meanwhile, settled at 3% in 2013, hitting the low end of the BSP’s 3-5% target.

January saw inflation accelerating to 4.2% from December’s 4.1%, prompting Mr. Tetangco on Wednesday to declare that the room to keep policy rates steady was “narrowing.”

February inflation will likely determine when the central bank will raise rates, an analyst said.

“While the central bank will be more vigilant on inflation and will probably raise rates, it is still too early to discern whether the recent pick-up in inflation is due to temporary factors, which will abate, or a result of underlying inflationary pressures,” said Trinh Nguyen, economist at HSBC in Hong Kong.

Mr. Tetangco said that moving forward, “the MB will continue to closely monitor and assess the evolving growth and liquidity conditions and will consider policy adjustments, when needed, to ensure continued price and financial stability.”

Policy tightening may lend some support to the peso, which has been swept up in a global emerging markets rout despite the country’s resilient economic growth figures.

The peso is the worst performing emerging market currency in Asia this year, losing 1.93% against the dollar and hovering at its weakest level in more than three years.

Mr. Tetangco told Reuters on Monday the central bank will not resort to “drastic policy action” to stem the peso’s slide, but it will be present in the foreign exchange market to smoothen sharp swings in the currency.

While a weak peso could exacerbate the impact of imported price inflation, it helps make Philippine exports more competitive and boosts the buying power of remittances from Filipinos working abroad, key drivers of growth. — reports from A. R. R. Gregorio and Reuters