BSP asks NEDA to raise 2003 inflation target to 4.5%-5.5%

The Bangko Sentral ng Pilipinas (BSP) wants the National Economic and Development Authority (NEDA) to revise upward the 2003 inflation target up to 4.5 to 5.5 percent to provide monetary officials the flexibility to keep interest rates low.

BSP Governor Rafael Buenaventura said yesterday that the NEDA has already admitted the possibility that next year’s inflation would inch up as a result of the unresolved conflict between the US and Iraq.

According to Buenaventura, the emerging estimates for 2003 are consistent with the original inflation forecast for 2003 which he said would give the BSP more room instead of being forced to keep inflation down to the four- to five-percent range approved earlier by the cabinet.

The BSP has been pressing for higher inflation target for 2003, saying that the four- to five-percent range is too restrictive, since the BSP’s monetary policies were virtually dictated by the Arroyo administration’s strategy of inflation targeting.

This meant that the BSP is obligated to adjust its monetary policies in order to stay within the inflation target set by NEDA.

However, in his testimony before the public hearing of the Senate committee on appropriations, NEDA Director General Dante Canlas had admitted that the 2003 inflation could reach an average of 5.5 percent should the US-Iraq conflict escalate into a shooting war.

Canlas said that if the US-Iraq conflict escalate, the impact on crude oil prices could send the barrel price to $32. At this level, he said inflation would go up to 5.5 percent and the national deficit would go up by P1.76 billion more.

Buenaventura said this is the original estimate made by the economic planning team and would make more policy sense in terms of setting monetary policies.

"I think he (Canlas) is on target," Buenaventura said. "We could have really brought the inflation rate down to four to five percent were it not for the extraneous situation we are looking at forn 2003 which would bring us back to the 4.5 to 5.5 percent range."

According to Buenaventura, the 4.5 to 5.5 percent inflation range had enough cushion for collateral damage should the Middle East crisis worsen and put more pressure on world crude oil prices.

Thus far, the BSP has been successful at keeping interest rates very low, at one point hitting a record low of 4.299 percent (April 29, 2002) for the 91-day treasury bill.

The Monetary Board has been confident enough to keep policy rates steady on the back of tame inflation rate and the persistently soft demand for credit despite modest improvements in domestic economic activity.

According to the BSP, inflation was likely to remain tame for the rest of the year and despite the increased output growth during the second quarter of the year, all other indicators pointed to the economy’s lack of appetite for credit.

This meant that the growth in domestic demand was not sturdy enough to convince monetary officials of its sustainability.