BSP execs fear power crunch may fuel inflation

Maintenance shutdowns, either scheduled or unscheduled, of major power plants may lead to a shortage of electricity supply in the country and may, in turn, fuel the rate of rise in consumer prices this summer.

The Bangko Sentral ng Pilipinas (BSP) likewise warned that, even if power plants were to continue to run smoothly, a supply squeeze would still be felt due to higher demand.

In a report released Friday, the BSP tagged the power sector as one of the few sources of possible inflation pressures in the coming months due to the country’s “thin reserve margins.”

“The Monetary Board noted that … maintenance shutdowns of power plants or delays in the commissioning of committed power projects could affect prices,” the central bank said in a report on matters discussed during its last policy meeting last Feb. 6.

“New capacities will also be needed to meet the demand for power based on projections of the Department of Energy,” the regulator said.

The BSP’s monetary policy setting, which influences bank lending and the supply of money in the economy, is dependent on the inflation outlook for the country. The BSP expects 2014 inflation to average at 4.2 percent, higher than the 3 percent registered last year.

The projected average for the year is still within the central bank’s target of 3 to 5 percent.

Latest data from the Energy department show that Mindanao is the worst hit by the power crunch.

Available capacity on the island currently stands at 1,326 megawatts (MW)—way below the power demand of 1,406 MW.

The government expects to remedy this deficit by early next year through the rehabilitation of old power plants and the upgrade of existing ones.

The power situation is better in Luzon and Visayas, where 13,677 MW of existing and committed capacity for this year may be enough to satisfy the expected demand of 12,487 MW.

On top of the country’s power supply problems, the Monetary Board has also aired its concern over the pending power rate hikes in Metro Manila—the implementation of which is currently on hold but may push through later this year.

Another possible source of inflationary pressures is the volatile condition of local financial markets, which is brought on by the gradual withdrawal of monetary stimulus measures in the United States.

“While financial market reactions have been relatively muted since the [US Federal Reserve’s] tapering announcement on Dec. 18, financial market and capital flow volatility may remain a concern,” the BSP report read.

“We will continue to monitor global developments, especially the impact of these on investor sentiment and domestic financial markets, and any spillover effects that may result in volatility in international commodity prices,” BSP Governor Amando M. Tetangco Jr. said earlier this week.

As inflation stayed above 4 percent in February, the BSP hinted at adjustments in the benchmark interest rates, which have stayed at record lows since late 2012.

Consumer prices rose by 4.1 percent in February compared with the 4.2 percent in January, the Philippine Statistics Authority (PSA) reported last Wednesday. The latest inflation figure, however, was faster than the 3.4 percent registered in February last year.

February inflation was also within the BSP’s projected range of 3.8 to 4.6 percent for the month.

Inflation accelerated in January to its fastest pace in two years due mainly to the adverse effects of supertyphoon “Yolanda,” which damaged farms and destroyed public infrastructure and private property last November.

The BSP stressed that the effects of Typhoon “Yolanda” on food prices would likely be temporary since the tightness in supply would ease with the repair of damaged infrastructure.

“The recent uptrend in inflation therefore appears to stem mainly from supply shocks, the impact of which is expected to be transitory,” the BSP said.