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Philippines: Inflation expected to top target – BSP
MONETARY authorities decided to keep key interest rates unchanged on Thursday but now expect inflation to breach their target for the year.
The Bangko Sentral ng Pilipinas’ (BSP) overnight borrowing, lending and deposit rates were maintained at 3.0 percent, 3.5 percent and 2.5 percent, respectively, following the Monetary Board’s first policy meeting for 2018.
Inflation forecasts for this year and and the next were adjusted upward, however, with 2018 now expected to see consumer price growth hitting 4.3 percent, much higher than the previous 3.4-percent projection and exceeding the 2.0-4.0 target.
The 2019 outlook was also raised to 3.4 percent from 3.2 percent.
“The Monetary Board’s decision is based on its assessment that while latest baseline forecasts show higher inflation outturns for 2018, the inflation path is expected to moderate and settle within the inflation target range of 3.0 percent ± 1.0 percentage point in 2019,” the Bangko Sentral said in a statement.
Monetary authorities acknowledged January’s 4.0-percent inflation result — the highest in three years — that it said was “due to better enforcement of tax laws on tobacco as well as temporary increases in prices of selected food items, such as fish and vegetables”.
The decision to keep key rates steady, said London-based research consultancy Capital Economics, was broadly expected.
“A key reason why other analysts expected rates to rise is mounting fears about inflation … however, rather than being the result of a build-up in demand-side pressures, the main factor behind the jump in inflation last month was an increase in indirect taxes on items such as fuel, automobiles and cigarettes which came into effect at the start of the year,” Capital Economics’ Gareth Leather said.
“Past experience suggests that although the year-on-year rate of inflation will remain elevated throughout 2018, inflation should drop back at the start of next year,” he added.
“If, as we anticipate, core inflation remains low over the coming year, the central bank will probably decide to ‘look through’ a temporary increase in headline inflation.”
All analysts polled by The Manila Times had expected inflation to pick up in January but not exceed the 2.0-4.0 target. They said that rising prices, however, would put pressure on the Monetary Board to adjust policy and several forecast that rate hikes could be announced as early as the February 8 policy meeting.
The impact of higher taxes under the recently-implemented Tax Reform for Acceleration and Inclusion law were said to have driven January inflation and a further increase in February could underline the case for a rate adjustment.
The Monetary Board will next meet to discuss policy on March 22.
The Bangko Sentral, in its statement, said monetary authorities had “noted that prospects for domestic activity continue to be firm on the back of robust domestic demand, manageable growth in credit and liquidity and a sustained recovery in global economic growth.”
“Nevertheless, the Monetary Board observed that the risks to the inflation outlook remain weighted toward the upside owing mainly to price pressures emanating from possible further increases in global oil prices,” it added.
While inflation expectations “continue to be anchored within the inflation target band over the policy horizon”, the Bangko Sentral said it remained on the lookout for second-round effects and inflation “becoming broader based”.
Monetary authorities, the BSP continued, remained committed to the central bank mandate of keeping prices stable and would closely monitor developments.
“The Monetary Board stands ready to take appropriate measures as necessary to ensure that the monetary policy stance continues to support price and financial stability.”
Source: http://www.manilatimes.net/inflation-expected-top-target-bsp/379085/