Inflows to keep inflation in check, says BSP

MANILA, Philippines—The Bangko Sentral ng Pilipinas expects foreign exchange inflows to remain robust this year and may help ease concerns over speculations that inflation will breach the official target ceiling.

BSP Governor Amando Tetangco Jr. said the sustained flow of dollars and other foreign currencies into the country would help stabilize the peso, tempering the increase in prices of imported commodities. As a result, inflation pressures would be less intense.

“The [country’s] positive external position should provide fundamental support for the peso, and help mitigate … inflationary pressures,” Tetangco told reporters.

Recently, the BSP announced that the country’s balance of payments (BOP) stood at a surplus of $4.58-billion in the first four months of the year. This was largely due to the increase in the inflow of remittances, foreign portfolio investments, and income from the central bank’s investments in foreign assets, mainly US Treasuries.

A surplus in the BOP means that total inflow of foreign currencies exceeds those flowing out. A rise in foreign currencies tends to increase demand for the local currency, resulting in the appreciation of the peso.

A stronger peso makes imported goods cheaper, thus tempering overall inflation.

In April, inflation hit 4.5 percent—the highest in 12 months. For the first four months of the year, inflation averaged at 4.2 percent.

Within target ceiling

The figures are still within the 3- to 5-percent target ceiling for the year, but developments such as rising oil and food prices in the world market has been stirring up concerns that inflation could breach the 5-percent mark this year.

The BSP said inflation could accelerate, but would not exceed the ceiling. It said inflation could even surpass the 5-percent mark in some months, but the average for the full year would still settle below 5 percent.

Also, Tetangco hinted that the BSP could allow the peso to remain relatively strong this year and help address the inflation problem, considered to be one of the biggest challenges affecting most emerging market economies this year.

Apart from rising global oil prices, growing domestic demand is another factor seen to push inflation in emerging markets like the Philippines.

The BSP earlier reiterated its commitment to ensure that inflation would stay within the official cap.

The BSP had already raised its key policy rates twice this year: The first was by 25 basis points in March, and the other was by another 25 basis points earlier this month.