BSP lowers inflation targets for 2010, 2011

MANILA, Philippines – Monetary authorities now sees lower inflation forecasts this year and next year in light of the reduction in power costs, lower oil prices, steady commodity prices, moderate liquidity growth, and the continued strengthening of the peso against the dollar.

Bangko Sentral ng Pilipinas Deputy Governor Diwa Guinigundo told reporters that the Monetary Board decided to lower its inflation forecast to 4.7 percent instead of 5.1 percent this year and to 3.6 percent instead of 3.7 percent next year

It would be recalled that the policy-setting body decided to raise its inflation forecast to 5.1 percent instead of 4.64 percent this year and 3.7 percent instead of 3.45 percent next year last April 22 after taking into consideration a possible wage increase and a transport fare hike.

However, Guinigundo said the Monetary Board’s assessment took note of the lower energy costs, lower oil prices, stable commodity prices, moderate liquidity growth, and stronger peso.

He pointed out that liquidity growth has started to ease over the past few months in light of the phasing out of several liquidity enhancing measures that were implemented way back in November of 2008 to cushion the impact of the global financial crisis on the domestic economy.

“Over the last few months, liquidity growth has started to moderate. It does not mean that liquidity growth is difficult. It continues to be ample but the growth has decelerated due to the withdrawal of liquidiry enhancing measures,” Guinigundo explained.

Latest data showed that money supply or domestic liquidity posted a double-digit growth of 10.3 percent to P3.894 trillion as of end-March from P3.53 trillion in the same period 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.

Crisis-related measures that were phased out included the increase in the rate on a short-term lending facility to four percent from 3.5 percent as well as the reduction of the peso rediscounting budget to P40 billion and further to pre-crisis level of P20 billion from P60 billion.

He also cited the stronger peso this year compared to that of last year. The peso, however, weakened breaching the 47 to $1 level during the height of the debt crisis in Europe.

“The more benign inflation outlook gives us more flexibility to keep our rates unchanged,” he added.

For his part, BSP Governor Amando Tetangco Jr. said the latest BSP projections show headline inflation averaging within the target of 3.5 percent to 5.5 percent this year and three percent to five percent next year.

“These projections are slightly lower compared to those of the previous policy meeting as a result of lower energy prices and slower domestic liquidity growth,” Tetangco said.

According to him, liquidity growth decelerated in recent months as a result of the BSP’s withdrawal of liquidity-enhancing measures implemented at the height of the global financial crisis.

Latest data from the National Statistics Office (NSO) showed that inflation eased to 4.3 percent in the first four months of the year from 6.4 percent in the same period last year. The BSP sees inflation ranging from 4.2 percent to as high as 5.1 percent in May from 4.4 percent in April.

The latest inflation forecast also took into consideration the stronger-than-expected gross domestic product (GDP) growth registered in the first quarter of the year. The country’s GDP zoomed to its fastest pace in almost three years after expanding by 7.3 percent in the first quarter of the year from only 0.5 percent in the same quarter last year. –Lawrence Agcaoili (The Philippine Star)