Gov’t keeps inflation target at 2-4%

The inflation target for the next three years has been kept at 2-4 percent on expectations of “manageable” increases in the prices of basic goods, notwithstanding the inflationary impact of the first tax reform package to be implemented starting early next year, the Bangko Sentral ng Pilipinas (BSP) said.

In a statement yesterday, the BSP noted that the Cabinet-level Development Budget Coordination Committee (DBCC), in a meeting on Dec. 22, decided to maintain the target inflation range for 2018 to 2020 as “the current manageable inflation environment could be sustained over the medium term.”

“Projections and expectations continue to indicate that inflation could settle within the current inflation target, although there are upside risks to the inflation outlook. Moreover, the inflationary impact of the potential increases in international commodity prices is assessed to be moderate, supported by lower pass-through to inflation of exchange rate and external commodity price inflation,” the BSP said.

According to the BSP, expectations of a healthy economic growth alongside the tax reform program would create demand-side impetus to inflation.

Gross domestic product growth is expected to remain robust until 2022, as economic managers targeted a 7- to 8-percent yearly expansion.

President Duterte last week signed into law package 1A of the Tax Reform for Acceleration and Inclusion Act (TRAIN) under Republic Act No. 10963. This package slashes and restructures personal income tax rates that stayed the same for two decades while jacking up or slapping new taxes on the consumption of oil, cigarettes, sugary drinks and vehicles. The changes will be implemented starting January 2018.

“Nonetheless, the favorable effect of sustained investment spending by the national government on the economy’s productive capacity would help temper inflation pressures,” according to the BSP.

BSP estimates showed that inflation could increase by 0.85-1.2 percentage points in 2018 and by 0.4-0.55 percentage points in 2019 due to the TRAIN.

But Monetary Board member Felipe M. Medalla told reporters last week that the TRAIN’s long-term effect was actually anti-inflationary.

“To the extent that the infrastructure will reduce transportation costs and increase productivity, in the long run, the TRAIN should reduce the inflation rate,” Medalla explained.

“However, initially, you would have the cost-push effect of the higher indirect taxes,” according to Medalla.

The TRAIN, alongside domestic and foreign borrowings, will help in the financing of the Duterte administration’s ambitious “Build, Build, Build” infrastructure program.