BSP says May inflation could exceed 5%

MANILA, Philippines - The Bangko Sental ng Pilipinas (BSP) sees inflation this month exceeding the higher end of the central bank’s three percent to five percent target on the back of the seasonal increases in school supplies due to the opening of classes in June, remaining adjustments in taxi fare, and the impact of the Aquino administration’s fuel subsidy program.

BSP Governor Amando Tetangco Jr. said in a text message to reporters that inflation for the month of May would range from 4.5 percent to 5.5 percent despite lower oil price in the world market.

“We have recently seen some easing in the price of oil in the international market, but there continue to be risks of volatilities in this market,” Tetangco stressed.

He pointed out that the higher inflation forecast this month factored in several factors including the remaining P10 flag down taxi fare adjustments, seasonal increases in school supplies, and the impact of fuel subsidies for jeep and tricycle operators.

Inflation kicked up to a one-year high of 4.5 percent in April bringing the average inflation to 4.2 percent in the first four months of the year from 4.3 percent in the same period last year.

He said the continued appreciation of the peso against the dollar would ease the continued build up of inflation pressures as monetary authorities continue to monitor internal and external developments.

“The BSP will continue to monitor developments to ensure that our stance for monetary policy remains appropriate,” Tetangco said.

The BSP has so far raised interest rates by 50 basis points in two consecutive policy rate setting meetings in March 24 and May 5 as a preemptive move to keep inflation expectations well anchored amid the escalating global oil prices.

The overnight borrowing rate now stands at 4.50 percent and the overnight lending rate is pegged at 6.50 percent after monetary authorities raised interest rates by 25 basis points last March 24 and by another 25 basis points last May 5 due to elevated oil prices.

BSP Deputy Governor Diwa Guinigundo said inflation expectations for 2011 would have gone up to 5.6 percent and for 2012 would have increased to 4.2 percent had monetary authorities kept interest rates unchanged.

With the rate hike, Guinigundo said inflation expectations for 2011 and 2012 is now back to within the target of three percent to five percent set for 2011 until 2014.

He added that the 50 basis point rate hike so far could still be accommodated within affecting the pace of the country’s strong economic recovery.

Prior to the rate hike last March, the central bank managed to keep interest rates steady for 20 straight months since July 2009 due to benign inflation outlook. The BSP slashed its key policy rates by 200 basis points between December 2008 and July 2009 to cushion the impact of the global financial crisis on the domestic economy.

Economic managers see the country’s gross domestic product (GDP) growing between seven percent and eight percent this year and next year.

The Philippines booked its strongest economic growth in 34 years after its GDP expanded by 7.6 percent last year from 1.1 percent in 2009.