For 2005 the BSP inflation target is 5 to 6 percent with a full-year forecast of 7.9 percent. This will no longer be changed, said Tetangco. Next year, however the inflation target is fixed at 4 to 5 percent and forecast at 7.5 percent, which would be adjusted to 8 to 8.5 percent once the DBCC agrees. They will meet this Wednesday.
It is the 2007 target and forecast that are currently under review. But Tetangco said the target is likely to be set at 4 to 5 percent, higher than what they were looking at earlier, which is 3 to 4 percent.
Meanwhile Tetangco said the recent monetary action is not "VAT-induced," that the broader sales tax is already factored in the 7.6 to 7.9 percent inflation forecast for the year. "Perhaps it will be slightly lower than 7.6 to 7.9 percent," the BSP chief said. The BSP has been calibrating the stance of monetary policy given significant threats to price stability. These are rapid liquidity growth and potential exchange rate volatility due to narrowing interest differentials.
BSP Deputy Governor Diwa C. Guini-gundo said the expanded VAT will affect 2006 and 2005 but, he clarifies, "we are not responding to the VAT." He said however that the country will have to go through "birth pains" with the new VAT but after 2006 the benefits will pour. (LCC)
The central bank said previously that the up-tick in inflation in 2005 and 2006 would be due to the impact of improved output growth and aggregate demand conditions as well as the expected cost-push impact of factors such as the volatility in oil prices. These factors are expected to put pressure on the inflation rate, on top of additional upside risks from the planned adjustments in import tariffs and utility charges.
As a matter of policy, the BSP market intervention function is triggered only when the peso-dollar exchange rate is threatening to have an adverse inflationary impact.
This means that if the exchange rate is threatening to blow up the inflation rate, the BSP eases market pressure by providing liquidity to the market, its euphemism for buying or selling dollars in the market when the peso is gyrating wildly.
The up-trend in inflation in recent months has essentially been generated by supply pressures, particularly increases in food and energy prices, which are expected to be temporary, and are outside the scope of monetary policy.
The BSP has already raised its policy interest rates by 75 basis points and the last one was October 20. It also raised the reserve requirements on bank deposits by two percentage points in July.
