Inflation forecasts cut anew

2012-2014 target also announced as BSP keeps policy rates unchanged

INFLATION FORECASTS for 2010 and 2011 were cut anew yesterday by the Bangko Sentral ng Pilipinas (BSP), which continued to keep policy rates unchanged as expected.

The central bank also announced a 2012-2014 inflation goal, saying the move had been approved by economic managers who wanted to provide markets a longer-term view.

As the Philippines showed little rush to join its neighbors in raising interest rates, analysts said adjustments were likely by the end of the year as strong economic growth built up inflationary pressures. Some expect the BSP to tighten policy in August.

The central bank, while acknowledging upward pressures on prices, now expects inflation to hit 4% in 2010 and 3% in 2011, down from 4.7% and 3.6%, respectively.

The BSP early in June cut the 2010 and 2011 inflation forecast from 5.1% and 3.7%.

The overnight borrowing rate was kept at 4% and the lending rate at 6%, as economists had expected, a day after Thailand became the latest central bank in the Asia-Pacific to start raising rates after the financial crisis.

The BSP said monetary policy was appropriate in the light of the favorable inflation outlook and on-target expectations.

“The Philippines is more in the position like the Indonesian central bank to remain patient, still playing it by ear,” said David Cohen of Action Economics in Singapore.

“We still think they will start hiking within the next few months, wanting to stay ahead of the inflation curve.”

Apart from Thailand, South Korea, Malaysia, Taiwan, India, New Zealand and Australia have all raised interest rates to tackle inflationary pressures.

The central bank said it would adopt a fixed inflation target of 3-5% for 2012 to 2014.

“The fixed medium-term inflation target aims to promote a long-term view on inflation, increase the predictability of monetary policy, help better anchor inflation expectations and support consumption and investment by fostering greater predictability in economic decisions,” central bank Governor Amando M. Tetangco, Jr. said in a press conference.

He the shift to a fixed medium-term inflation target, from a variable annual inflation target set every two years, was approved by the Development Budget Coordination Committee last July 9.

Diwa C. Guinigundo, BSP deputy governor, said the medium-term target would be reviewed annually.

The fresh lowering of inflation forecast for this year and the next, said Mr. Guinigundo, was primarily due to lower than expected price rises for May and June.

“The main reason was the lower than expected May and June inflation rate, that’s the major contribution to the lowering of the projection for 2010 and 2011,” he said.

Inflation eased to 3.9% last June from 4.3% in May.

“Domestic price of petroleum products also went down during the period even as domestic liquidity showed a higher growth compared to what we considered in the last meeting of the monetary board,” Mr. Guinigundo said, adding that an approved P22 minimum wage hike for Metro Manila was below their forecast of P25.

The BSP’s steady policy stance has worried some analysts, who said leaving rates at a record low in a period of strong growth risked intensifying inflationary pressures.

“My concern is that this risks them falling behind the curve because the rest of the region has already started to normalise, even though inflation numbers there are similarly moderate,” Nomura economist Euben Paracuelles said.

“Our indication shows that the output gap is closing and demand-side pressures are picking up. I am still sticking to my view that there is still a risk of the BSP hiking in Q3, but the risk of that is kind of lower after today’s decision.”

Yesterday was the ninth Monetary Board meeting where the BSP decided to hold key policy rates, which it brought down to their current lows as part of measures ride out a global downturn.

“The uncertainty over the strength and pace of the global economic recovery warranted maintaining current policy settings,” Mr. Tetangco said. — from reports by Reuters and JBFS