BPI sees need to revise inflation targets for 2015

MANILA, Philippines - The Bangko Sentral ng Pilipinas (BSP) may need to revise inflation targets for 2015 given the foreseen upticks in the rate for this year and the next following the devastation by typhoon Yolanda, according to the Bank of the Philippine Islands (BPI).

“Ensuring that inflation falls within a very low and very tight two to four percent target in 2015, a level more compatible with developed economies with top-notch infrastructure, will be a much more difficult job,” Emilio S. Neri Jr., lead economist at BPI, said in a research note.

“The BSP (Bangko Sentral ng Pilipinas) may very well want to revise their target upwards by then,” Neri said.

The central bank has an inflation target of three to five percent for this year and the next, and a two to four percent range for 2015.

Earlier this week, BSP Governor Amando M. Tetangco, Jr. said inflation this year could average 3.2 percent, and up to 4.5 percent in 2014. Both are higher than the central bank’s October forecasts of three percent and four percent for 2013 and 2014, respectively.

“In order to comply with its dual mandate of price and financial market stability, its may be in the best interest of the BSP to afford a small adjustment in its inflation target as such a move will enable monetary authorities to simultaneously afford financial market sustainability and price stability, all the while providing the real economy the fertile ground for consumption-led economic growth,” Neri said.

Inflation has averaged 2.8 percent in the 10 months to October, which means the rate is expected to hit above five percent in November and in December for the average to reach 3.2 percent this year.

Neri noted that the market may not be ready for such an uptick given inflation has been hovering between two to three percent for majority of the year.

“If BSP is true to its inflation targeting mandate to respond only to demand-pull inflation, they should not hike interest rates to defend their 2014 and 2015 targets,” Neri said.

“Such hikes may be potentially disruptive to financial markets, causing undue stress to bond and currency markets,” he added.

The BSP’s policymaking Monetary Board has kept policy rates steady since the start of the year on the back of a robust economic growth and benign inflation environment.

The Monetary Board’s last rate-setting meeting is slated for Dec. 12.