BSP explains to Malacañang why inflation was breached

by Lawrence Agcaoili, The Philippine Star, Feb 4, 2019

MANILA, Philippines — The Bangko Sentral ng Pilipinas (BSP) has explained to Malacañang why the upper end of the inflation target was breached for the first time in a decade as the rise in consumer prices kicked up to 5.2 percent last year from 2.9 percent in 2017.

In a letter to President Duterte dated Jan. 25, BSP officer-in-charge Chuchi Fonacier said inflation in 2018 breached the upper end of the central bank’s two to four percent target due to supply side factors.

Fonacier pointed out the increase in domestic pump prices of oil products mirrored the continued rebound in international crude oil prices amid geopolitical tensions and production cutbacks among major oil-producing countries.

She added food inflation also rose as a result of supply bottlenecks associated with adverse weather conditions and seasonal typhoons in the middle part of the year constraining the supply of key food items, particularly rice, meat, fish, and vegetables.

At the same time, the BSP deputy governor said the direct and indirect effects of the excise tax reforms under Republic Act 10963 or the Tax Reform for Acceleration and Inclusion (TRAIN) Law implemented at the start of 2018 also contributed to price pressures.

“The increases in domestic food and oil prices drove second-round effects, as transport groups petitioned for increases in minimum fares, while various labor groups lobbied for upward adjustments in minimum wages across the country. These developments pushed inflation beyond the target range of two to four percent in 2018,” Fonacier said.

This prompted the BSP’s Monetary Board to raise interest rates by 175 basis points in five straight rate-setting meetings from May to November last year after maintaining a status quo in early 2018 as its inflation forecasts remained within the target range and as inflation expectations showed no signs of being disanchored.

However, rising inflation expectations and early signs of second-round effects during the second quarter of the year underscored the risk posed by sustained price pressures on future wage and price outcomes paving the way for the tightening cycle.

“The cumulative 175-basis-point hike in the key policy interest rate was aimed at anchoring the public’s inflation expectations to help ensure that the price pressures would not evolve into sharper gains in wages, transportation fares, and prices of other goods and services,” Fonacier told Malacañang.

She said inflation readings as of late have been encouraging as both headline and core inflation continued their decline since the last quarter of 2018.

“Looking ahead, we are optimistic that inflation will continue to ease in the coming months given our monetary tightening in 2018 as well as the national government’s decisive anti-inflation measures, including the liberalized importation of key commodities such as rice, meat, fish, and sugar,” she added.

The latest assumption of the central bank’s Monetary Board show inflation would ease back within the two to four percent target at 3.2 percent this year and three percent in 2020.

“We assure the President and the Filipino people that the BSP shall continue to confront inflation with an appropriate and vigilant stance of monetary policy,” she said.

The BSP is required to issue an open letter to the President and the Filipino people to explain if it misses its inflation target. In 2008, the upper end of its three to five percent target was breached as inflation kicked up to 9.3 percent due to elevated oil and food prices.

In 2015 and 2016, the central bank also issued open letters as inflation fell below the two to four percent target after averaging 1.4 percent in 2015 and 1.8 percent in 2016 due to lower oil and food prices.