BSP says strong first quarter growth won't spur runaway inflation

MANILA, Philippines - Monetary authorities believe that the stronger-than-expected economic growth registered in the first quarter of the year would not result in runaway inflation this year.

Bangko Sentral ng Pilipinas Deputy Governor Diwa Guinigundo said in an interview with reporters that the 7.3-percent growth in gross domestic product (GDP) in the first quarter of the year would not put pressure on consumer prices this year and next year.

“So even if you have a seven percent economic growth for the rest of the year, that will not necessarily lead to unstable inflation for 2010 and 2011,” Guinigundo explained. 

The BSP has set an inflation target of 3.5 percent to 5.5 percent this year and three percent to five percent next year. Authorities are confident that inflation would fall within the target this year and next year.

The BSP, however, now expects inflation to average 5.1 percent instead of 4.64 percent this year and 3.7 percent instead of 3.45 percent next year on the back of possible wage increase, fare hike, and continued increase in oil prices. Authorities even expect inflation to hit a high of about six percent in June or July before easing towards the end of the year.

“There  should be some critical convergence of better inflation factors or favorable inflation factors and the high inflation pace of about seven percent,” Guinigundo said.

Latest data from the National Statistics Office (NSO) showed that average inflation eased to 4.3 percent in the first four months of the year from 6.4 percent in the same period last year. Headline inflation was steady at 4.4 percent in April from 4.4 percent in March.

The BSP official pointed out that other factors such as unused capacity, oil and commodity prices, rate of wage increase, and pace of global economic recovery that could mitigate inflation build up helping the country sustain a GDP growth of higher than seven percent through out the year.

“If the other factors or determinants of inflation start to ease, in other words, if other factors of inflation are mitigated then you may have a convergence of high economic growth and stable inflation that can come from lower oil prices, lower commodity prices especially when the global economy remains weak,” Guinigundo added. 

According to him, the adjustment in wages that is much less than originally assumed of P50 to P75 per day together with stable exchange rate would also mitigate the build up in inflation.

Guinigundo said the BSP is carefully assessing the impact of Europe’s debt crisis as well as the growing tension between North and South Korea during the board’s policy meeting on June 3.

“Based on what we saw in the first quarter it looks like economic recovery is stronger than originally anticipated. So we will now monitor what is going to happen to the global economy given all the happenings in Europe and even in Korea. We will definitely monitor all of these developments and see how we can navigate through the very difficult and challenging environment,” he added.

The BSP slashed its key policy rates by 200 basis points between December of 2008 to July of 2009 to cushion the impact of the global financial crisis. This brought the overnight borrowing rate to a record low of four percent and the overnight lending rate to 6.0 percent.

The board has kept its rates at record lows for seven straight policy setting meetings since July last year but has continued to unwind crisis-related measures adopted in November of 2008 to release liquidity into the financial system to support domestic economic activity to survive the global economic meltdown.

Crisis-related measures adopted way back in November of 2008 that were tweaked included the increase in the rate on a short-term lending facility to four percent from 3.5 percent last January 28 as well as the reduction of the peso rediscounting budget to P40 billion and further to pre-crisis level of P20 billion from P60 billion, the restoration of the loan value of all eligible rediscounting papers to 80 percent from 90 percent of the borrowing bank’s credit instrument, and the restoration the non-performing loan (NPL) ratio requirement of two percentage points from 10 percentage points.