By Lee C. Chipongian
Bangko Sentral ng Pilipinas (BSP) Governor Nestor A. Espenilla Jr. said inflation expectations will remain on target and they will ensure this on May 10 when they meet for the third Monetary Board policy meeting for the year.
“The BSP will carefully consider the latest developments and their impact on price dynamics, particularly potential second-round effects,” Espenilla said Friday. “Decisions on the monetary policy stance will seek to ensure that inflation and inflation expectations remain consistent with the inflation target over the policy horizon.”
In a separate statement, the central bank said based on the 2012 consumer price index series, the inflation rate will keep its elevated level in 2018 and decelerate close to the midpoint of the target range next year. “The inflation forecasts, along with the public’s inflation expectations, are continually being updated to consider latest developments. We are looking out for potential second-round effects and broader-based price pressures.”
Headline inflation increased to 4.5 percent year-on-year in April from 4.3 percent in March, bringing the year-to-date average to 4.1 percent. This exceeds the BSP target of two percent to four percent for this year until 2020. The BSP however noted that on a month-on-month seasonally adjusted basis, inflation eased to 0.3 percent in April compared to 0.7 percent in March.
BSP Deputy Governor Diwa C. Guinigundo said that in their monitoring of the numbers, while they consider all data updates, their eye is mostly on the inflation path over the medium term.
“We don’t just focus on what we see today but you have to look at it with the medium-term perspective — what is next in 2019 and 2020,” he said. “We have to also look at what’s happening in inflation expectations in the light of what the market describes as increasing trend of inflation and higher inflation expectations – those two are important inputs to monetary policy consideration,” said Guinigundo.
“The market – wrongly or correctly – believes that inflation expectations is beginning to be disanchored, and people say that prices have gone up and that this is the time for the BSP to reconsider its present monetary policy stance,” he remarked. “But then you have the discipline of inflation targeting, you just don’t move the policy rate without considering all of the factors that we normally consider in inflation targeting.”
Guinigundo said that since they see inflation falling to within the target in 2019 – and considering both price and monetary conditions – “if inflation is expected to revert to a target consistent path, then why move at this point?”
He however stressed that if “all of this points of consideration (indicate) the need for the BSP to undertake some decisive action we will not have second thoughts on this because maintaining price stability is our primary mandate.”
Guinigundo said inflation is elevated because of the revised tax policy and high petroleum prices, and these are all on the supply side. “Monetary policy doesn’t normally respond to supply side (factors),” he added.
During its previous policy meeting on March 22, the BSP estimates average inflation forecast of 3.9 percent for 2018 and three percent next year.
The central bank is currently reviewing a measured policy response to ensure that the 2019 inflation target is not at risk.