By LEE C. CHIPONGIAN
With the strong peso, the Bangko Sentral ng Pilipinas said the emerging inflation scenario next year could be closer to eight percent.
"We expect inflation pressures to ease a bit because of the strength of the local currency and declining oil prices both international and domestic," BSP Deputy Governor Diwa C. Guinigundo said Friday. The peso moved below
P55:$1 in early November from a previous low of P56.30 in late September.
"(The central bank) also expect inflation pressure to be less (than anticipated) even with the expanded VAT," he added. The government will impose the 12 percent VAT rate on February 1.
With these positive developments – stronger peso and easing oil prices, Guinigundo said inflation next year would be lower than 8.5 percent, the rate forecasted earlier. "It could be closer to the lower end of the assumption," he said, which is about eight percent.
An easing in food prices and stable foreign exchange as well as moderate growth in domestic demand helped contain inflation, which in October hit seven percent from 8.5 percent in March.
Earlier the BSP said inflation rate would range 8 to 8.5 percent in 2006, considerably higher than original forecast of 7.5 percent. But it is maintaining the 7.6-7.9 percent inflation expectation for the year, which is already VAT inclusive.
BSP Governor Amando M. Tetangco Jr. said last week that since the peso has appreciated and oil prices have eased, this would reduce price pressures, prompting a reassessment of next year’s forecast.
The central bank’s foreign exchange projection for the year and the next is
P55.57:$1 but Guinigundo said the peso could be lower than P55. In the meantime BSP estimates Dubai crude to settle around $49.92 per barrel this year and $56-$60/barrel in 2006. At the moment imported crude is sold for $51/barrel.
For the third time this year the central bank adjusted policy rates higher to protect inflation outlook for 2007. Normally, BSP uses its interest rates to contain inflation caused by "demand side" factors, which include increased economic activity or rising wages.
The BSP’s inflation target is the core basis for setting its monetary policies. It keeps a two-year inflation targeting policy and is expected to announce its 2007 target by the end of the year.
Inflation targets are set once however BSP inflation forecasts are revised from time to time. Targets are left alone and are not reversed due to the negative business perspective on inflationary expectations. Forecasts are also announced in a "timely manner" to control expectations.
For 2005 the BSP inflation target is 5 to 6 percent with a full-year forecast of 7.6-7.9 percent. This will no longer be changed. 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 inter-agency Development Budget Coordinating Committee agrees.
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.
Guinigundo 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.
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.(LCC)
