Inflation seen to remain low until 2018

THE CENTRAL BANK is maintaining its record-low inflation target for the next three years, with officials confident that the deepening of the Philippine economy would help keep prices stable.

The Bangko Sentral ng Pilipinas (BSP) yesterday announced its medium-term targets for the movement of consumer prices. Having helped keep prices stable for the last six years, the BSP said inflation would remain subdued up to 2018.

“Prospective inflation trends indicate a manageable outlook over the medium term,” the BSP said in a statement.

For the first time in history, monetary authorities moved to a lower inflation target range of 2-4 percent in 2015 from 2014’s 3-5 percent. This means the BSP may act more aggressively to ensure that price movements stay within the range.

The BSP said the same target would be maintained for 2016 to 2018. Last year, inflation averaged 4.1 percent, despite nearly breaching the target range in July and August. The late deceleration in price movements was a result mainly of the drop of fuel prices.

Protecting consumers’ purchasing power by keeping prices stable is the central bank’s main goal. This is done by managing the amount of cash circulating in the economy. The BSP also influences interest rates set by banks for their borrowers.

BDO chief market strategist Jonathan Ravelas said risks to inflation in the medium term were muted given weak economic conditions in advanced economies, particularly Europe and Japan.

“One of the reasons oil prices are down, other than a supply glut, it’s also driven by weaker economies,” he said in an interview. “Definitely, there will be less pressure on inflation.”

Earlier, officials said improvements in the economy’s capability to produce more goods for consumption would help keep prices stable. The “pass-through” effects of the peso’s value, BSP Governor Amando M. Tetangco Jr. said, has also gone down, making the country less susceptible to volatility in commodity markets.

“Structural changes in inflation dynamics and improvements in the economy’s productive capacity support a low inflation environment that is consistent with the economy’s growth trajectory,” the BSP statement read.

It added that the new targets “present a long-term view on inflation and fosters greater predictability, which helps economic decision-making by businesses, households and other economic agents.”

The announcement comes ahead of the BSP’s first interest rate-setting meeting for the year on Feb. 12. BSP’s Tetangco earlier said cheaper fuel prices in world markets give the policy-making Monetary Board space to keep interest rates near record lows.