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BSP to revise 2006 inflation targets |
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By Donnabelle L. Gatdula
The Philippine Star 10/11/2005 Monetary authorities are likely to revise upwards their internal inflation rate targets for 2006 to take into consideration the impact of the movement of the oil prices and the possible implementation of the expanded value-added tax (EVAT). BSP Deputy Governor Diwa Guinigundo said the Monetary Board (MB), the policy-making body of the BSP, will review the inflation projections. "As I said, it is still 7.5 percent subject to change. The MB will look at it this week. Maybe it will be close to targets of the Development Budget Coordinating Council (DBCC)," Guinigundo said. The DBCC forecasts the inflation rate to range between eight to 8.5 percent for next year. The BSP’s original inflation rate forecast is 7.5 percent to 7.9 percent in 2005 and 7.5 percent in 2006. It was not clear if the BSP will also change its other macroeconomic assumptions with the possible revision in the inflation rate forecast. Monetary authorities earlier admitted that they want to remain "cautious" on their monetary policy stance despite a slowdown in inflationary pressures for September. "While the moderation from the earlier month is as expected there remain potential risks to inflation down the road such as the movement of oil prices," Bangko Sentral ng Pilipinas (BSP) Governor Amando Tetangco Jr. said. Tetangco said "it is important to guard against second round effects. Liquidity growth and interest rate differentials are also significant considerations. Given this, monetary policy should remain cautious." The BSP chief said they viewed the slowdown in headline inflation to seven percent in September as a welcome development. "The slowdown is in accordance with the bank’s expectations of a mild deceleration in inflation for the remainder of the year," he said. But Tetangco was quick to point out the presence of inflationary pressures. "Although overall inflation pressures continue to be driven at present by oil prices, improving conditions for agricultural crop production and supply in the coming months should help ease the prices of major food items, which presently account for about half of the CPI basket. This should provide a counterbalance to the effects of rising oil prices on the general price level. Similarly, the continued deceleration in core inflation suggests an easing of overall demand-based pressures on consumer prices," he said. September’s inflation rate, Tetangco said, would play an important role in the BSP’s decision whether to adjust policy rates or not. "The slowdown will be an important consideration in the BSP’s ongoing assessment of the monetary policy stance," he said. He also pointed out that the monetary policy under the BSP’s inflation targeting framework responds primarily to inflation several quarters into the future rather than to current or past inflation. In the past few months, monetary policy has been tightened in order to address the various risks to inflation, particularly those risks associated with rising inflation expectations, rapid liquidity growth, and potential exchange rate volatility due to narrowing interest differentials. The BSP raised its policy interest rates by 25 basis points in April and by another 25 basis points in September. It also raised the reserve requirements on bank deposits by two percentage points in July. |
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