Cheaper fuel to keep inflation in check, says BSP

The impact of higher transport and utility costs on overall consumer prices is expected to be negligible, giving monetary authorities room to support the economy by maintaining or even cutting interest rates in 2015.

Bangko Sentral ng Pilipinas (BSP) Governor Amando M. Tetangco Jr. said cheaper fuel, which carries significant weight in the basket of consumer goods tracked by officials, means average inflation would remain stable.

This comes amid the recent approval of petitions that will mean higher water rates in Metro Manila.

A long-delayed increase in fares at the Light and Metro Rail Transit (LRT, MRT) lines in Metro Manila will also take effect this week.

“Evolving price conditions point to a manageable inflation environment,” Tetangco told reporters.

Water rate adjustments will have an effect on inflation of about 0.01 of a percentage point.

Higher train fares, meanwhile, may raise inflation by a tenth of a percent.

Both components make up a combined 0.7 percent of the nationwide inflation basket, the BSP said.

For 2015, the BSP wants to keep inflation between 2 and 4 percent, the lowest target range ever set by local policymakers. This increases the chances that regulators will act more aggressively to stem any price pressures.

Tetangco said if fuel prices continue to fall as they did in the later months of 2014, then inflation could slow enough to allow for a possible cut in benchmark rates.

Last year, the BSP’s overnight borrowing and lending rates were hiked from record lows by half a percent-age point to 4 and 6 percent, respectively.

Most analysts see the BSP acting on both benchmarks again by the second half of this year as it responds to the expected hikes by the US Federal Reserve.

Cutting rates would keep the cost of money low, providing a much-needed boost to economic activity, which slumped to 5.3 percent in the third quarter of the year, the slowest since 2011.

The central bank chief said the BSP would not commit to any specific plan of action, noting that fuel prices may rise “just as fast” as they have fallen.

In a note to clients, Singapore’s DBS bank said inflation for 2015 may stay steady at 4 percent, which is at the top end of the BSP’s target.

“Lower crude oil price will mean lower prices of utilities, which have been a major factor in pushing inflation toward 5 percent in mid-214,” DBS analyst Gundy Cahyadi said in a note to clients.