BSP sees benign inflation but cites risks

Prices of basic goods and services are expected to remain benign for the rest of this year and next—and possibly even more so in 2021—according to the policymaking body of the Bangko Sentral ng Pilipinas.

But monetary planners fear that any increase in the cost of electricity or transportation as well as the looming increase in taxes for alcohol may end the current low inflation regime being experienced across the country.

According to the minutes of its most recent interest rate-setting meeting last month, the Monetary Board said it believed the Philippines’ consumer price index would average 2.6 percent for 2019 and 2.9 percent over the next two years, slightly lower than the forecasts set in the previous month.

The downward revision in the staff inflation forecasts could be attributed to weaker global and domestic economic growth, lower global crude oil and non-oil prices, and slower domestic liquidity growth, the group said.

It warned, however, that “petitions for electricity rates and transport fare adjustments, the proposed increase in the excise of alcoholic beverages, and the potential impact of a prolonged El Niño episode are the main upside risks to future inflation.”

Mitigating these risks are the prospects of slower global economic growth due to the escalation of protectionist policies in advanced economies and geopolitical tensions continue to be the main downside risks to the projected inflation path, the Monetary Board said.

The group—composed of the seven most senior officials of the central bank and led by the governor—meets every six weeks to decide on the level of interest rates in the Philippine financial system, based primarily on its reading of inflation in the local economy.

Its next meeting is scheduled for Sept. 26 when market watchers expect it to cut the central bank’s key overnight borrowing rate by another 25 basis points following last week’s announcement by the government that August inflation had fallen to 1.7 percent, the lowest in almost three years.

BSP Governor Benjamin Diokno earlier promised another quarter of a percentage point interest rate cut before the end of the year to help offset the lackluster economic growth in the first semester. He has also committed to reducing banks’ reserve requirements to single digits from the current level of 16 percent before the end of his term in 2023.