The central bank may stick to its lower inflation target for the next three years, signaling to the market that it will work harder to keep prices stable even as the country’s growing economy fuels stronger consumer demand.
For 2015 and 2016, the Bangko Sentral ng Pilipinas (BSP) will set its inflation target lower to 2 to 4 percent annually from 3 to 5 percent this year.
BSP Deputy Governor Diwa C. Guinigundo said the same lower target range could be kept until 2017.
This may mean that monetary authorities expect the economy to remain stable.
The new inflation target for 2017 has yet to be presented by the interagency Development Budget Coordination Committee (DBCC).
“To a certain extent, we’re insulated because we have remittances and (business process outsourcing) revenues,” Security Bank economist Patrick Ella said, reacting to the central bank pronouncement.
Ella said the decision to keep the lower target range up to 2017 could also mean that the peso would stay strong or even appreciate against the US dollar, protecting consumers from foreign exchange fluctuations that might make imported commodities, such as fuel, more expensive.
He said the new BSP target—if approved—would support the view that fluctuations in food and fuel prices could be temporary.
Food prices recently have been on the rise due to a shortage resulting from the damage to farmlands caused by Supertyphoon “Yolanda.”
Dryer weather in the months ahead, as a result of the El Niño phenomenon, is expected to result in even poorer harvests.
Oil also has become more expensive due to tensions abroad, particularly in Iraq, which is embroiled in a civil war.
This year, inflation is expected to average at 4.4 percent this year.
Next year, the BSP sees inflation averaging at 4.7 percent.
Both forecasts are near the BSP’s target range for 2014 and 2015.
To temper inflation, the BSP has adjusted reserve requirements for banks to mop up about P120 billion in liquidity from the domestic economy—a move aimed at curbing demand to offset the effects of supply issues on prices.
Last week, the BSP also raised special deposit account (SDA) rates by 25 basis points to encourage banks to park more money in central bank vaults.
Most analysts expect the BSP’s benchmark overnight borrowing and lending rates to be raised from their record lows later this year.
The government expects to spend P106 billion over the next three years for reconstruction in the Visayas, which was devastated by a 7.2-magnitude earthquake, apart from the supertyphoon.
This would go on top of rehabilitation projects funded by multilateral lenders and aid partners through overseas development assistance (ODA) loans.
Reconstruction efforts are expected to provide a boost to economic growth this year.
In an interview on Tuesday, Ateneo de Manila University economist Cielito Habito said the economy usually would get a boost two quarters after a natural disaster.
“That’s because of the reconstruction that happens,” he said.
Due partly to the damage caused by the typhoon, economic growth slowed down to 5.7 percent in the first quarter of 2014—slower than the 6.3 percent in the fourth quarter of 2013 and the 7.7 percent expansion in the first quarter of last year.
Last year, the Philippine economy grew by 7.2 percent—faster than any other country in Southeast Asia and second only to China in the continent.
The effects of reconstruction on domestic output are expected to kick in by the second half of this year.
The Philippine economy is still seen to grow between 6.5 percent and 7.5 percent this year, members of the Development Budget Coordination Committee said last week.
Next year’s estimated P2.6-trillion general appropriations act will focus heavily on disaster preparedness and measures to combat the effects of climate change, Budget and Management Secretary Florencio Abad said earlier this week.
Last week, the DBCC revised its assumption for the peso to a weaker range of 42 to 45 to a dollar this year from the previous 41 to 44: $1 range.
Guinigundo said this was due to expectation that the country would have to import more amid reconstruction efforts in the Visayas and as the economic growth drives demand for more products from abroad.