The Bangko Sentral ng Pilipinas (BSP) expects inflation to average 4.3 percent this year and breach the 2-4 percent target range due to the impact on consumer prices of the first tax reform package as well as expected global oil price hikes.
The Monetary Board, the BSP’s highest policymaking body, kept the policy rate steady at 3 percent while also maintaining the prevailing rates for the overnight lending and deposit facilities.
BSP Governor Nestor A. Espenilla Jr. said in a statement that the central bank’s latest baseline forecasts show higher inflation outturns this year, such that its 2018 forecast was raised from 3.4 percent during the previous policy meeting in December.
Francisco G. Dakila Jr., managing director of the BSP’s monetary policy sub-sector, explained to reporters that the impact of tax reform was not included in their baseline forecast during the Dec. 14 meeting.
Train impact
“Now that the TRAIN has been passed, the baseline assessment now includes the TRAIN’s impact,” Dakila said, referring to the Tax Reform for Acceleration and Inclusion Act.
Signed by President Duterte in December, the TRAIN Law starting Jan. 1 this year jacked up or slapped new excise taxes on oil, cigarettes, sugary drinks and vehicles, among other goods, to compensate for the restructured personal income tax regime that raised the tax-exempt cap to an annual salary of P250,000.
The government reported last Tuesday that headline inflation rose to an over three-year high of 4 percent year-on-year in January as average consumer prices increased faster due to the new or higher excise taxes slapped on a number of products under the TRAIN Law.
Government data showed that the rate of increase in prices of basic goods last month was the fastest since the 4.3 percent posted in October 2014.
“The inflation outturn for January was within expectations but close to the high end” of the target range for 2018, Dakila noted.
Espenilla attributed the higher inflation rate in January to “better enforcement of tax laws on tobacco as well as temporary increases in prices of selected food items, such as fish and vegetables.”
Under the TRAIN Law or Republic Act No. 10963, the unitary excise tax slapped on cigarettes rose to P32.50 per pack effective Jan. 1 from P30 a pack last year.
The state planning agency National Economic and Development Authority, meanwhile, partly blamed the higher prices of food items last month to “lingering effects of successive typhoons that occurred in the last quarter of 2017.”
Oil prices
Dakila pointed to expectations of continued rise in global crude oil prices.
“Although the inflation number for 2018 has been adjusted upwards, the change in inflation due to supply-side factors is essentially a transitory issue,” Dakila said.
“By March next year, we should be back within the inflation target band,” Dakila added.
Espenilla said “the inflation path is expected to moderate and settle within the inflation target range of 2-4 percent in 2019.”
The BSP nonetheless also raised its inflation forecast for 2019 to 3.5 percent from 3.2 percent previously.
According to Espenilla, the Monetary Board “also noted that prospects for domestic activity continued to be firm on the back of robust domestic demand, manageable growth in credit and liquidity, and a sustained recovery in global economic growth.”
Risks
“Nevertheless, the Monetary Board observed that the risks to the inflation outlook remain weighted toward the upside owing mainly to price pressures emanating from possible further increases in global oil prices. At the same time, the Monetary Board saw that inflation expectations continue to be anchored within the inflation target band over the policy horizon,” Espenilla said.
As such, “the BSP is watchful against any signs of second-round effects and inflation becoming broader based,” according to Espenilla.
“Given these considerations, the Monetary Board reiterates that it remains committed to the BSP’s price stability objective and will continue to closely monitor the evolving conditions for prices and output for any threats to the inflation target. The Monetary Board stands ready to take appropriate measures as necessary to ensure that the monetary policy stance continues to support price and financial stability,” Espenilla added.