BSP revises inflation target

The Bangko Sentral ng Pilipinas (BSP) has revised its inflation target for 2008 to three to five percent from the original target of four to five percent.

The BSP also said its projected full-year average for 2006 was upgraded to 6.4 percent, implying further deceleration in the December inflation rate.

The 2008 target was actually placed at four percent, plus or minus one percentage point. This reflected a shift in the expression of the target that effectively widened the range.

BSP governor Amando Tetangco Jr. said the shift meant to give the Monetary Board even more flexibility in steering inflation, especially since the inflation rate is heavily dependent on volatile items such as food.

According to Tetangco, the new method of target expression is more appropriate for the Philippine setting where large supply stocks tend to affect prices particularly in food, which constitutes a significant portion of the consumer price index.

"It’s also meant to align our monetary policy practices with other countries such as the UK, Canada, New Zealand, Indonesia and Mexico where ranges for headline inflation are expressed in two points or more," he said.

On the other hand, Tetangco said the full-year inflation rate could go down to as low as 6.4 percent from the original projection of 6.9 to seven percent.

"If you look at the trend, the turnaround in inflation rate happened earlier than projected," he said. "We said the deceleration will start in the second half but it actually happened in May."

Tetangco said the deceleration was due to the easing of oil prices and impact of good harvest on food prices.

"In December, aside from these factors, we’re looking at the impact of the lifting of exemption on (value-added tax or) VAT which took place in November 2005," he said. "That usually takes a year to filter through the system and we will see the full impact probably this month."

Tetangco said the Development Budget Coordination Committee has also approved the macro-economic assumptions that would be used for 2007, based on revisions made by the BSP.

The BSP projected the balance of payment surplus to decline to $1.602 billion in 2007, down significantly from $2.759 billion this year.

This was due to the expected decline in the current account from $3.793 billion to $3.485 billion in 2007.