Inflation seen above 7% in 2005 as BSP maintains rates

The country’s inflation rate is expected to surge above seven percent in 2005 due to a shortage in supply of certain agricultural goods, aggravated by the impact of the increase in world oil prices as well as the possible adjustment in wages.

This scenario loomed yesterday as the Bangko Sentral ng Pilipinas (BSP) decided to keep key overnight interest rates unchanged at 6.75 percent for borrowing and nine percent for lending.

Despite mounting inflationary pressures, the BSP said importation and not monetary policies, were the more effective tool against price surges because much of the pressure was related to actual supply of goods.

Projections made by the BSP indicated that at least in the short term, inflation rate could go up to as high as 7.75 percent during the early months of 2005.

According to the BSP, however, the August inflation is likely to go down to 5.19 percent after hitting six percent in July.

The BSP’s Department of Economic Research (DER) disclosed that the prices of domestic goods would continue to bear the brunt of pressures created by short supply of certain agricultural commodities, aggravated by the impact of world oil prices as well as the possible adjustment in wages.

BSP-DER Managing Director Diwa Guinigundo told reporters that the BSP has already adjusted its assumptions on world oil prices from $35 per barrel to $40 per barrel.

"There is a hump in the projected trend but that is largely transitory," Guinigundo said.

However, Guinigundo pointed out that the BSP’s projections were also based on the assumption that wages would not go up beyond four percent this and next year.

"So far we are not seeing any mounting pressure to adjust wages beyond four percent," Guinigundo said. "There have been adjustments in the cost of living allowance but that doesn’t have much inflationary impact."

As long as the adjustments are contained in the COLA instead of the basic wages of salaried workers, Guinigundo said the Monetary Board might be able to get away with not doing anything.

After its meeting yesterday, the MB decided that supply-side policies were more relevant than monetary tools, urging the government to take immediate steps to mitigate inflationary pressures through importation.

The BSP has already warned early on that the actual inflation may exceed targets for 2004 and 2005 because of the impact of the increase in world oil prices.

According to the BSP, there were inflationary pressures but these were due to factors that were completely out of the influence sphere of monetary policies because much of the tension was spawned by supply-side factors.

"Monetary tightening restrains inflation pressures primarily by curbing aggregate demand," BSP Deputy Governor Amando Tetangco Jr. said. "The direct impact on consumer goods of supply-side factors such oil prices, is on production costs rather than demand."

Tetangco said that although the MB expected upward pressure on inflation rate, it would be temporary and would not require monetary action.

"On the other hand, the application of non-monetary government measures such as timely importation, may help ease supply pressures on certain consumption goods," he said.

Tetangco added that historically, past episodes of supply-related inflation pressures showed that headline inflation tended to quickly recover its long-term trend after a brief upsurge.