The country’s inflation rate is expected to creep upward in the coming months due to the rising prices of crude oil in the international market together with what the Bangko Sentral ng Pilipinas believes will be temporary effects of tax hikes enacted into law recently.
According to the BSP’s policy- making Monetary Board, however, these price increases will likely be mitigated by government measures and the resulting improvements in productivity and output over the medium term.
This was the collective view of the seven-man Monetary Board at its most recent meeting last month—made public yesterday—where it decided to keep the central bank’s key interest rates unchanged.
More importantly, the Monetary Board pointed out that proposed reforms in the rice industry involving the replacement of quantitative restrictions with tariffs and the deregulation of rice imports could serve to reduce the average inflation rate which was influenced heavily by the price of the staple food.
“The risks to future inflation remained weighted toward the upside,” the Monetary Board said, citing the “transitory impact” of the tax increases that were signed into law late last year by President Duterte to help fund his administration’s aggressive infrastructure buildup program.
The government announced last week that average prices of goods and services rose by 3.3 percent in December 2017 and 3.2 percent for the entire year, which was within the central bank’s target range of 3 percent, plus or minus 1 percentage point—the same range it sees for this year and next.
The BSP’s key overnight borrowing rate, which commercial lenders use as a pricing guide for their own lending activities, remains at 3 percent, unchanged since 2014.
The Monetary Board—chaired by BSP Governor Nestor Espenilla Jr.—said pending petitions for transport fares and electricity rates increases were the main upside risks to inflation.
The central bank noted that demand in the domestic economy remained “relatively firm,” with the economy having grown 6.9 percent in the third quarter of 2017 and averaging 6.7 percent in the first three quarters of the year.
“On the expenditure side, both domestic and external demand fueled output growth,” the Monetary Board said. “On the supply side, growth was driven by the services sector while growth in the industry sector was supported by robust growth in manufacturing.”
Last week, Espenilla said the central bank was not inclined to raise interest rates anytime soon given the overall economic picture being presented to the Monetary Board. In particular, the central bank chief noted that he was prepared to give the Philippine economy room to grow by keeping the cost of money as low as long as he could without fueling inflation.