The Bangko Sentral ng Pilipinas (BSP) said the government's plan to remove subsidies of National Food Authority (NFA) and other moves to raise transport fares will not have a significant impact on its inflation forecast.

BSP Deputy Governor Diwa C. Guinigundo yesterday said the possible removal of government support in the NFA importation of rice will only move inflation rate higher by 0.37 percentage point for 2010 and 1.24 percent for 2011. This also include adjustments in transport fares, which have already been incorporated but given additional proposals for an increase, BSP noted that the impact will also be minimal.

The current forecast for inflation is four percent this year and three percent in 2011.

Guinigundo told a briefing on inflation that price of rice will likely increase if subsidy such as tax exemptions will be reduced or removed.

At the moment, NFA rice is priced at P25 per kilo. "A possible price adjustment of P3 or 12 percent will have an impact on inflation forecast of 0.21 percentage point for 2010 and 0.11 percentage point for 2011," he said. "Assuming that subsidies will be lifted in August."

BSP also assumed a fare hike of P5 for jeepneys and P10 for taxis. The adjustment to forecast will be 0.03 percent to 0.06 percent to inflation. Increases in MRT and LRT fares will also have a minimal impact of 0.10 percentage point for 2010 and 0.27 percentage point for 2011.

"Given the projection, it will still be within the target range of forecast and this is our initial estimate," he said.

For the month of July, BSP said inflation could fall to as low as 3.5 percent compared to June’s 3.9 percent.

This was driven by lower average prices of Dubai crude and the consequent declines in domestic prices of petroleum. The forecast range for July inflation was 3.5 percent to a high of 4.4 percent.

In the first six months the average inflation rate was 4.2 percent, within the BSP's 2010 target level of 3.5 percent to 5.5 percent. The June rate of 3.9 percent was lower compared to May’s 4.3 percent. The second quarter inflation of 4.2 percent is lower than the first quarter's 4.3 percent average.

Guinigundo said that while inflation remains manageable, the BSP will also continue to keep a close watch on price pressures that may emerge over the near term and the BSP will "act preemptively when warranted to achieve the price stability objective."