BSP wants inflation from tax hikes contained

by Daxim L. Lucas, Inquirer, Feb 1, 2018

Monetary planners are keeping a careful watch on potential “second round” effects on the Duterte administration’s tax hikes that were implemented last month in a bid to keep prices of goods and services from rising more than they should, the country’s central bank chief said on Thursday.

In a message to reporters, Bangko Sentral ng Pilipinas Gov. Nestor Espenilla Jr. said studies are being conducted on the broader impact of the so-called Tax Reform for Acceleration and Inclusion (Train) Law before any decision is made to raise interest rates.

“The first round price effects of Train and other factors such as oil prices are evolving more or less as expected,” he said, reiterating his view that the higher inflation caused by the tax program would be “transitory.”

“However, we are carefully assessing next round effects and how inflation expectations could be affected,” Espenilla said. “These considerations will be at the center of the coming policy discussions.”

Interest rates

The tax reform program—which raised excise taxes on so-called sin products and petroleum, but made the country’s lowest earning workers tax exempt-was meant to help fund the Duterte administration’s P9-trillion infrastructure buildup program, to address the country’s creaky transportation networks, among others.

The central bank’s policy making Monetary Board is set to meet later this month to decide whether to raise interest rates to stave off inflation preemptively, or to keep them at current levels and help the economy grow faster through lower borrowing costs.

Espenilla said “significant developments” that occurred since the Monetary Board’s last policy review in December 2017 would be reexamined carefully this month.

“We have been updating the data and evaluating various price surveys to gain insight on the overall impact on the inflation outlook. This is an intensely data-driven exercise,” he said, adding that the “ability to meet the inflation target comfortably and mitigating the upside risks is very important to the BSP.”

Prediction

Meanwhile, central bank economists yesterday predicted that the inflation rate for the first month of 2018 would settle within the 3.5-4.0-percent range.

“The increase in the prices of domestic petroleum products on account of higher global crude oil prices along with higher food prices due to weather-related disturbances could contribute to the rise in inflation for January,” BSP’s Department of Economic Research said.

“In addition, higher excise taxes on fuel, sugar sweetened beverages with the implementation of the Train this month, would lead to additional upward price pressures,” the group added in a statement. “The increase in prices could be partly offset by lower electricity rates in Meralco-serviced areas for the month.”