BSP sees inflation dipping below 4% in 2012

MANILA, Philippines—The Bangko Sentral ng Pilipinas expects inflation to average below 4 percent in 2012, saying the benign increase in consumer prices should help encourage higher spending by individuals and enterprises.

In an ambush interview with reporters, BSP Governor Amando Tetangco Jr. said moderate inflation expected in 2012 would help boost domestic growth, particularly through the spending channel, and thus mitigate the ill-effects of the continuing debt and economic problems in the eurozone on the Philippines.

“Inflation has started to trend down, and the expectation for this year is that it will be below the midpoint of the target range,” Tetangco said.

The official inflation target for this year is between 3 and 5 percent.

The central bank chief added that moderate inflation will complement plans of the government to boost spending.

He said the economy could grow faster in 2012 than in 2011 should inflation expectation and spending plans materialize.

In the first three quarters of 2011, the economy grew by 3.6 percent. While economists said the rate was respectable, it made the full-year target of at least 4.5 percent difficult, if not impossible, to achieve.

The slower-than-desired growth in 2011 was blamed partly on the economic woes of the eurozone and the United States, which are two of the biggest export markets. The problems in the West led to declines in export incomes of emerging Asian economies, including the Philippines.

The slow growth last year was also attributed to underspending by the national government.  Finance officials, however, earlier vowed to reverse this year the underspending last year. They said pump-priming will be a focus of the government’s fiscal program for 2012.

“With both fiscal and monetary-policy support, growth of the economy may be boosted and the impact of the slower export growth may be mitigated,” Tetangco said.

He said the low-inflation environment gave the BSP the flexibility to cut interest rates.

The BSP has signaled it may cut its key policy rates, which influence commercial interest rates, in the first quarter of this year. Monetary officials said lower interest rates should help boost demand for loans, and thus help accelerate rise in consumption and investments.

“We have room for possible easing [of interest rates] this quarter given the favorable inflation outlook,” Tetangco said.

The BSP’s key policy rates currently stand at 4.5 percent for overnight borrowing and 6.5 percent for overnight lending.