Tetangco feels inflation pressure has eased

MANILA, Philippines - The Bangko Sentral ng Pilipinas (BSP) believes that the upward pressure on inflation has somewhat eased over the past few months, boosting the chances that average consumer prices would fall within the targets set by the central bank for 2011 and 2012.

BSP Governor Amando M. Tetangco Jr. said in an interview with reporters that average inflation this year and next year would fall within the three-percent to five-percent target set by the central bank.

“Based on our forecast of the inflation path, there could still be some upward pressure on the inflation rate but it is not as strong as we had projected it earlier,” Tetangco stressed.

The continued build up in inflation pressures on the back of elevated oil and commodity prices in the world market prompted the BSP to raise interest rates by 25 basis points last March 24 and by another 25 basis points last May 5 to keep inflation expectations well anchored.

The twin rate hike brought the overnight borrowing rate to 4.50 percent and the overnight lending rate to 6.50 percent.

Lower than expected inflation rate in May allowed monetary authorities to keep interest rates steady last June 16 but decided to raise the reserve requirement ratio for banks to siphon P38 billion from the financial system and curb additional inflationary pressures arising from excess liquidity.

Latest data released by the National Statistics Office (NSO) showed that inflation climbed to a 26-month high of 4.6 percent in June from 4.5 percent in May on the back of more expensive power rates, upward adjustments in tuition fees, higher prices of food items as well as alcoholic beverages and tobacco.

The 2000-based inflation last month was the highest since April 2009 when inflation averaged 4.8 percent. This brought the average inflation to 4.3 percent in the first half of the year from 4.2 percent in the same period last year.

Core inflation - which strips out volatile food and fuel items - tipped off at four percent in June from 3.7 percent in May.

Without the tightening measures including the rate increase and the higher reserve requirement for banks, the country’s inflation could have averaged as high as 5.6 percent this year and 4.16 percent next year.

“So for the year as a whole, the forecast inflation rate is somewhat lower than what we had projected last month or the previous meeting of the Monetary Board,” the BSP chief explained.

The BSP is scheduled to conduct its next policy rate setting meeting on July 28.

Dutch banking giant ING sees the BSP keeping interest rates steady on the back of benign inflation but could further raise the reserve requirement for banks next week.

“We are at the end phase of any rate hike. The BSP would contiue to hold monetary policy steady,” ING senior economist Joey Cuyegkeng told reporters in a Mid-year Economic Briefing held yesterday.

Cuyegkeng said the BSP would likely raise the reserve requirement ratio of banks by 100 percentage points to 21 percent from the current level of 20 percent on July 28.

“There is going to be a pause for next week but a reserve requirement hike is possible,” he added.

According to him, ING sees inflation averaging 4.7 percent this year and 4.6 percent next year or well within the three percent to five percent target set by the BSP.

He pointed out that the inflation would likely breach the higher end of the BSP target in the third quarter but would likely peak at only 5.2 percent.