Upside risks to inflation remain, says BSP

DESPITE its benign inflation outlook in the medium term, the Philippine central bank sees upside risks given the pending petitions for power and transport fare hikes and the possibility that global commodity prices could turn upward, an official said. “Should the inflation outlook turn out to be less favorable as growth continues to gain traction domestically, then there could be some inflation pressures, but we remain cognizant of that,” Bangko Sentral ng Pilipinas (BSP) Assistant Deputy Governor Ma. Cyd Tuano-Amador said.

“Although that will be dependent on the global recovery,” she said.

“If our central forecasts hold, then we are seeing comfortable inflation reading. Comfortable in the sense that they are within targets,” she added.

The June inflation was a notch above the low-end forecast range of the central bank, which earlier said price increases would average between 3.8 percent and 4.7 percent for the month.

Last month’s figure brought the six-month average inflation to 4.2 percent, still within the full-year target range of 3.5 percent to 5.5 percent.

The BSP has adopted a fixed medium-term inflation target of between 3 percent and 5 percent in the next two to four years, which would promote a long-term view on inflation and increase the predictability of monetary policy.

Monetary authorities argued that by adopting this fixed target, they can better anchor inflation expectations and support consumption and investment by fostering greater predictability in economic decisions.

“We don’t see any sharp adjustments in interest rates. So any adjustment in interest rates will be calibrated, not sharp which could add volatility to the markets. We are in a position to avoid such sharp adjustments because we see [based on our central view of how inflation and growth dynamics are turning out],” Tuano-Amador said.

In line with adopting a fixed inflation target, monetary authorities on July 15 also left the overnight borrowing or reverse repurchase rate (RRP) at 4 percent and the overnight lending or repurchase (RP) rate at 6 percent.

“The current stance of monetary policy—based on the different indicators that we track, based on both output considerations, like growth prospects moving forward and also the inflation outlook—is broadly appropriate,” Tuano-Amador said.

She said the BSP sees a better second-quarter reading for the domestic economy, mainly because electoral spending in May will spread out in succeeding months.

“It will be a good second quarter. For one, because of electoral spending and we think that there is still some base effect due to low growth numbers last year,” the BSP official said.

“We monitor quite a number of indicators—leading, coincident as well as backward looking indicators. So far second quarter outlook is quite good,” she added.

The Development and Budget Coordinating Committee earlier raised the country’s growth target to between 5 percent and 6 percent this year and by 7 percent to 8 percent in 2011. –Lailany P. Gomez Reporter, Manila Times