MANILA, Philippines – Monetary authorities expect oil prices to remain stable over the medium term, prompting the Bangko Sentral ng Pilipinas (BSP) to keep its inflation target at two to four percent until 2020.
BSP Deputy Governor Diwa Guinigundo said oil prices would remain stable despite the decision of the Organization of the Petroleum Exporting Countries (OPEC) to lower global production.
The group agreed to cut output by 1.2 million barrels per day starting January while non-OPEC producers decided to reduce exports by 600,000 barrels per day resulting in a dramatic jump in prices to above the $50 per barrel level.
“We expect that in terms of oil prices, one very important element in forecasting inflation, is that through the medium term we expect that supply will continue to outstrip demand,” he said.
Guinigundo said the interagency Development Budget Coordination Committee (DBCC) has recently approved the oil price assumption between 2017 and 2022.
The price of oil is expected to gradually increase from a range of $40-$55 per barrel for 2017, to $45-$60 per barrel for 2018, and to $50-$65 per barrel between 2019 and 2022.
He explained three OPEC members are exempted from the lower production quotas while non-OPEC oil producing countries are expected to undertake some marketing moves to protect their market share.
“With that, we would expect oil prices to continue to be more than stable, maybe elevated, but in general stable,” Guinigundo said.
The BSP has raised its inflation forecast to 3.3 percent instead of three percent for next year and to three percent instead of 2.9 percent in 2018 due to the higher than expected inflation in November, the impact of the stronger domestic economy, rising oil prices, and the five percent depreciation of the peso against the dollar.
Upside risks include the possible power rate hike as well as the impact of the Duterte administration’s comprehensive tax reform package while the downside risk is the continued softness of the global economy.
Furthermore, he pointed out the absence of severe El Niño and La Niña weather conditions would keep agriculture safe at least for 2017.
For 2019 and 2020, the DBCC approved the inflation target of between two and four percent.
“Structural changes in inflation dynamics alongside improvements in the economy’s productive capacity have been supporting a low and stable inflation environment that is consistent with the healthy pace of economic growth,” BSP Governor Amando Tetangco Jr. earlier said.
The BSP chief said robust domestic demand and sustained improvement in productive capacity following the government’s thrust towards higher government spending and tax reforms underpin the assessment of manageable inflation outlook over the medium term.
Tetangco added the BSP’s strong commitment to price stability has kept inflation expectations well anchored to the target over the policy horizon.
“The BSP will continue to monitor price developments to ensure that the monetary stance remains appropriate in keeping inflation within target,” he said.