BSP hikes inflation forecasts

Business World

Rates unchanged; adjustments expected next year

THE CENTRAL BANK kept key rates unchanged during its final 2010 policy meeting yesterday but prospects of an upward adjustment next year increased as it also issued higher inflation forecasts.

"The Monetary Board’s decision [to maintain rates] was based on its assessment that the inflation outlook remains favorable, indicating that current policy settings continue to be appropriate," Bangko Sentral ng Pilipinas (BSP) Governor Amando M. Tetangco, Jr. said.

"Moreover, the current movements of asset prices, particularly in the equities and properties markets, do not appear to pose any short-term challenge to the economy," he added.

Overnight borrowing and lending rates were kept at 4% and 6%, respectively, unchanged since July 2009 and leaving the Philippines as one of the few Asian countries not to have raised rates since the global financial crisis.

"They are an inflation-targeting central bank and currently inflation is below their target," UBS economist Edward Teather said.

"We are expecting them to raise policy rates in the coming year, but the timing would be closer to the middle of the year rather than near term on account of the favorable price and credit growth environment at the moment."

An uptick in inflation last month, however, prompted monetary authorities to adjust forecasts for 2010 and the next two years, BSP Deputy Governor Diwa C. Guinigundo said.

"[The] major reason [for raising the forecasts] is the increase in the November actual inflation rate. It has a significant impact on succeeding months," Mr. Guinigundo said.

The rise in consumer prices accelerated to 3% last month from October’s 2.8%, bringing the average for the year to 3.8%, at the bottom end of the BSP’s 3.5%-5.5% inflation target for the year.

Mr. Guinigundo said the central bank now expects 2010 inflation to average 3.8%, up from the 3.6% forecast announced in November.

The forecast for 2011, meanwhile, was raised to 3.6% from 2.4% while that for 2012 was set at 3%, higher than the previous outlook of 2.8%. The new forecasts remain within the BSP’s inflation targets of 3.5%-5.5% for this year and 3.0%-5.0% for 2011-2012.

Mr. Guinigundo said the new forecasts also took into account higher oil prices and a weaker exchange rate given the likelihood of a smaller balance of payments (BoP) surplus next year. Upcoming railway fare and toll hikes were also considered, he added.

The BoP surplus was at $13.178 billion as of end-November, higher than the $8.2 billion forecast for 2010. The BSP expects the BoP surplus to narrow to $1.9 billion next year.

Mr. Tetangco said the Monetary Board recognized that inflation pressures could come from higher commodity prices and stronger demand growth.

"Looking ahead, the BSP will remain vigilant against any emerging risks to the inflation outlook and will adjust policy settings if and when needed to ensure that future inflation remains consistent with the medium-term target while being supportive of sustainable economic growth," the BSP chief said.

What would make the central bank adjust policy, said Mr. Guinigundo, are beyond target inflation and "very solid" economic growth.

The economy expanded by 7.5% in the first three quarters of the year, well above the 5.0%-6.0% target. Analysts expect a slowdown in 2011 but the government is so far keeping a 7.0%-8.0% goal.

"We remain vigilant even as we have kept rates steady since July 2009," Mr. Guinigundo said.

"The market can be assured that the BSP remains attentive to any emerging risk," he added. -- Louella D. Desiderio with a report from Reuters