BSP says inflation may exceed 5% this year

MANILA, Philippines – Monetary authorities believe that consumer prices could still breach the higher end of the three to five percent target set by the Bangko Sentral ng Pilipinas (BSP) and peak this quarter due to the continued build up of inflationary pressures.

BSP Deputy Governor Diwa Guinigundo said in an interview with reporters that inflation could still breach five percent but average inflation for 2011 would be well within the midpoint of the full-year target.

“It is difficult to rule that out in the face of volatile petroleum prices,” Guinigundo replied when asked whether inflation could still exceed the higher end of the BSP target.

The BSP has set an inflation target of three percent to five percent between 2011 and 2014.

“In the absence of the complete reassessment of the forecast, what we can say is broadly speaking the expectation is going to lie close to the midpoint for this year and below the midpoint for next year,” he added.

Latest data released by the National Statistics Office (NSO) showed that inflation climbed to a 26-month high of 4.6 percent in June from 4.5 percent in May on the back of more expensive power rates, upward adjustments in tuition fees, higher prices of food items as well as alcoholic beverages and tobacco.

The 2000-based inflation last month was the highest since April 2009 when inflation averaged 4.8 percent. This brought the average inflation to 4.3 percent in the first half of the year from 4.2 percent in the same period last year.

Core inflation – which strips out volatile food and fuel items – tipped off at four percent in June from 3.7 percent in May.

Guinigundo said the projected uptick in consumer prices could be caused by the base effect arising from low inflation last year, the impending rise in the cost of electricity, and higher pump prices of petroleum products caused by volatile oil prices in the world market.

If the June inflation would be factored into the forecast, he explained that the latest inflation forecast of the BSP set during the policy rate setting meeting of the Monetary Board last June 16 could still be lowered.

Based on its latest inflation forecast, the BSP sees inflation falling within the target this year and next year after the BSP raised interest rates by 50 basis points and increased the reserve requirement ratio for banks to 20 percent from 19 percent.

The BSP raised interest rates by 25 basis points last March 24 and by another 25 basis points last May 5 bringing the overnight borrowing rate to 4.50 percent and the overnight lending rate to 6.50 percent.

Lower than expected inflation rate in May allowed monetary authorities to keep interest rates steady last June 16 but decided to raise the reseverve requirement ratio for banks to siphon P38 billion from the financial system and curb additional inflationary pressures arising from excess liquidity.

According to him, the BSP is still on a tightening cycle as risks to inflation are still tilted on the upside.

“That is the broad indication. It is very difficult to rule out further shocks and therefore potential for tigthening because the upward risks are still dominant. The (inflation)path is coming down but anything can happen,” Guinigundo said. –Lawrence Agcaoili (The Philippine Star)