BSP raises inflation forecasts for 2017, 2018

Inflation this year and next year are expected to pick up faster than earlier expected due to higher oil prices as well as a weaker peso, Bangko Sentral ng Pilipinas officials said Thursday.

During the meeting of the Monetary Board, the BSP’s highest policymaking body, the central bank kept the policy rate of 3 percent, the interest rates on the overnight lending and deposit facilities and the reserve requirement ratios, Deputy Governor and officer-in-charge Nestor A. Espenilla Jr. told a press conference.

“While inflation has risen due to the recent increases in food and oil prices, latest baseline forecasts continue to indicate that the future inflation path will remain within the target range of 2-4 percent for 2017-2018,” Espenilla said.

In January, headline inflation rose 2.7 percent, the fastest in more than two years.

As such, the BSP also raised its inflation forecasts for 2017 and 2018 to 3.5 percent and 3.1 percent from 3.3 percent and 3 percent, respectively, Deputy Governor Diwa C. Guinigundo said.

Guinigundo attributed the higher forecasts to increasing fuel prices and the depreciation of the peso since the fourth quarter of 2016.

The peso slid to the 49:$1 level—an eight-year low—late last year, and has stayed at the upper half of this range.

Espenilla said the Monetary Board deemed the balance of risks to the inflation outlook weighted toward the upside, especially as they expect increases in power rates on top of the impact of the expected passage of first package of the Duterte administration’s tax policy reform program by midyear.

As the Department of Finance had proposed slapping new or increased taxes on consumption, including higher excise tax rates on oil products and vehicles, prices of basic goods were expected to rise faster in the near term.

The Monetary Board sees uncertainty over global growth prospects as a key downside risk to inflation this year, Espenilla said.

“The Monetary Board stressed that while the global economic environment has become more challenging due to expected shifts in macroeconomic policies in advanced economies, including the ongoing normalization of monetary policy in the United States, domestic economic activity is expected to stay firm, supported by buoyant household consumption and private investment, increased fiscal spending, and ample credit and liquidity,” Espenilla said.

“With these considerations, the Monetary Board believes the prevailing monetary policy settings remain appropriate,” he said.