BSP urged to raise ’15 inflation target

The Bangko Sentral ng Pilipinas may have to raise its projected inflation range for 2015 of 2-4 percent to allow it to keep up with the volatility in liquidity flows globally in the next two years, according to economists from Bank of the Philippine Islands.

A “mild” adjustment in the BSP’s 2015 inflation target was seen going “a long way in assuring domestic financial stability,” said a BPI research paper for August written by economists Emilio Neri Jr., Nicholas Antonio Mapa and Robbin Ivory Brillantes.

The economists said a wider band would allow the BSP to keep up with the “mercurial tides,” referring to volatile flows of liquidity globally.

The study noted that the BSP’s careful calibration and dynamism amid the changing tides had effectively shielded the Philippine financial system from the recent shift in global liquidity flows.

But in keeping with its desire to fulfill its mandate to ensure price and financial stability, it said the BSP should consider widening its 2015 inflation target, which the BPI economists expected to be widely accepted by the market.

The research said: “BSP may resort to invoking flexibility and widen its inflation target to avoid a volatile interest rate environment, a scenario which could emerge with its pre-set 2015 inflation target of 2 to 4 percent.”

It added that the BSP’s 2015 inflation target might be “incompatible” with the central bank’s adoption of a “middle-of-the-pack” stance on the peso, noting that recent actions had increasingly shown its resolve to keep the peso from straying too far from the regional norm.

The BSP’s “middle-of-the-pack policy” was seen to have a tolerable pass-through impact (imported inflation) on the headline Philippine inflation in the coming quarters, the research said. The research argued that the slight uptick in “imported” inflation could be absorbed if only to ensure that one-way bets against the currency would be avoided.

The research paper noted that recent episodes had shown the pitfalls of a one-way bet against the peso as institutions without natural hedge against currency devaluation converted liabilities to dollars earlier in the year.

It said the BSP would continue to safeguard the stability of both prices and the financial sector through its deployment and calibration of macro-prudential measures as the country rounded the cape of investment grade and on to a higher growth path.

“The BSP’s more flexible exchange rate policy, embodied in their efforts to keep the dollar-peso (exchange rate) in the middle of the regional pack, will likely lead to an upward adjustment in the BSP’s 2015 inflation target, which will, in turn, enable monetary policy authority to keep interest rates stable in the next 18 months,” the research said.

The BPI research stated that the upside risk to its 41.50 to $1 exchange rate forecast for end-2013 had increased in light of sustained exchange market pressure among regional currencies and the BSP’s decision to remain competitive.

The peso closed on Friday at 43.64:$1 versus the previous day’s finish of 43.97 against the dollar.—Doris C. Dumlao