Inflation seen within BSP 3-5% target this year

MANILA, Philippines – Dutch financial giant ING NV sees the inflation average in the Philippines falling within the 3-5 percent target set by the Bangko Sentral ng Pilipinas (BSP) amid the escalating global oil prices as well as clamor for higher wages.

ING senior economist Joey Cuyegkeng said in a report that the investment bank is retaining its inflation forecast of 4.8 percent for this year despite the continued rise in oil prices in the world market.

Cuyegkeng pointed out that the expected seven percent growth in the agriculture sector in the first half due to favorable weather and cash crops would result in a moderation in food prices offsetting the impact of rising oil prices.

“Inflation may not be as bad as expected. Although there are still offshore price pressures that affect local energy prices, agriculture’s recovery may allow some moderation,” he stressed.

He pointed out that the investment bank had already factored into the forecast second round effects such as a moderate 6-7 percent wage increase.

“As long as wage increases are moderate at around 6 percent to 7 percent, the higher cost of labor should not translate to a higher average inflation forecast,” the economist added.

The BSP’s Monetary Board raised interest rates by 25 basis points last March 24 as a preemptive move to keep inflation expectations well anchored amid the escalating global oil and food prices.

The BSP kept interest rates at record lows for 20 straight months since July 2009 due to benign inflation outlook. It slashed key policy rates by 200 basis points between December 2008 and July 2009, bringing the overnight borrowing rate at a record low of four percent and the overnight lending rate at six percent to cushion the impact of the global financial crisis on the domestic economy.

The Philippines posted its strongest economic growth in 34 years last year after its gross domestic product (GDP) posted a surprising growth of 7.3 percent from 1.1 percent in 2009. The feat was achieved amid a low inflation environment of 3.8 percent.

Economic managers through the Cabinet level Development Budget Coordination Committee (DBCC) sees the country’s GDP expanding between seven percent and eight percent this year and next.

Cuyegkeng explained that the country’s economic fundamentals remain encouraging despite a weaker external environment.

On the fiscal front, he said strong tax collections would help the Aquino administration beat its budget deficit ceiling of P112 billion in the first quarter of the year after booking a shortfall of P8.1 billion in the first two months of the year.

“With reported tax revenues exceeding March and first quarter targets, we expect the first quarter fiscal deficit to be lower than the P112 billion deficit target,” he added.

According to him, higher crude oil prices could generate about P6 billion to P18 billion in additional value added tax collections for the National Government while higher inflation average would translate to higher tax collections.

Fiscal authorities hope to trim the budget deficit to P300 billion or 3.2 percent of GDP this year from a record level of P314.5 billion or 3.7 percent of GDP last year.

“Together with the stricter administration of tax measures, we believe that government would remain in line with its P300 billion deficit target. Possibility of outperforming the deficit target remains high in our view as long as government remains in line with its spending program or that any increase such as the limited transport subsidy would be well managed,” he said. –Lawrence Agcaoili (The Philippine Star)