Inflation won’t top 6% this year – BSP chief

Published August 17, 2018, 12:00 AM

by manilabulletin_admin

By Lee C. Chipongian


Nestor A. Espenilla Jr. (Bloomberg)
Nestor A. Espenilla Jr. (Bloomberg)

The central bank does not see inflation rate breaking 6.0 percent for 2018, but it will likely peak in August with a “close” figure to July’s 5.7 percent, according to its highest-ranking official.

“We are not seeing six percent (inflation for August),” Bangko Sentral ng Pilipinas (BSP) Governor Nestor A. Espenilla Jr. told reporters on the sidelines of Friday’s “Philippine Economic Forum” hosted by the National Press Club of the Philippines.

Espenilla does not think inflation rate will reach seven percent either – in August or September – and reiterated what he has been saying for months that they see the highs reaching its peak in the third quarter this year before slowing down.

“We are not seeing seven percent (and) based on our forecast, we are not seeing six percent. It might be close to the last one (July’s 5.7 percent),” he said.

The BSP has raised policy rates by a total of 100 basis points so far for this year to rein in the elevated inflation expectations and to temper emerging second round effects.

During its August 9 Monetary Board policy meeting, the BSP readjusted its inflation forecasts to 4.9 for 2018 and 3.7 percent for next year, compared to previous estimates of 4.5 percent and 3.3 percent, respectively. For 2020, like in 2019, the forecast of 3.2 percent is within the two-four percent inflation target.

Espenilla once again reassured the public that they are committed to managing the inflation environment and are prepared to act when warranted. “We have left the door open for further action in case we have to as more data come in,” he said. For the first seven months, inflation averaged 4.5 percent. Inflation rose to 5.7 percent in July from 5.2 percent in June and 4.6 percent in May.

The BSP chief also addressed concerns over the possible impact of Turkey’s currency crisis which could add another level of volatility to the local peso.

Espenilla said the Turkish lira crisis brings another element to both the inflation and foreign exchange dynamics. “We hope that crisis will settle down so we don’t have to worry about. (Still) a lot can happen it can create instability of the exchange (market) … our peso can be affected.”

Espenilla said he sees plenty of possibilities if the Turkish lira “dives deeper into crisis” but that they will “prepare for the worst” while hoping the situation will eventually correct itself.

The Turkish lira has lost more than 35 percent vis-à-vis the US dollar, a result of a US-Turkey trade war on steel products and other items. Based on reports, this is all tangled up in a diplomatic disputes over the repatriation of an American evangelical pastor who was being held in Turkey.

Espenilla said they will continue to let market forces dictate the peso-US dollar exchange rate but they are allowed to intervene in times of excessive volatility. He has often noted that the inflation-exchange rate dynamics are changing, although the pass-through effect has diminished over time.

“Starting in the second quarter 2018, we note that (inflation) forecasts have shifted higher over the policy horizon. Upside risks also continue to dominate the inflation outlook. Meanwhile, inflation expectations remain elevated. We also recognize that sustained pressures on the peso could adversely affect inflation expectations,” said Espenilla. The BSP responded by raising policy rates last May, June and August.

The peso at the mid-P53 level versus the greenback has depreciated by almost seven percent since 2018 started, mainly because the US dollar is strong on rising US rates and market concerns over global trade wars and higher prices of international oil which are driving up inflation not only in the Philippines but across all other economies.

The BSP has been on an aggressive signalling of monetary response since late July. While raising rates is not directly to impact the exchange rate, on Friday Espenilla said they are maintaining a “flexible and market-determined exchange rate which allows us to conduct independent monetary policy focused on assessment of domestic conditions (and promotes) our resilience against external shocks.”

Espenilla added that the “recent depreciation of the peso is attributed to both fundamental and non-fundamental factors.” These fundamental factors, he said, include: higher demand for imports of capital goods, raw materials and intermediate products in support of our growing economy; and dollar debt repayments, prepayments, and outward investments.

“Meanwhile, non-fundamental factors reflect various market sentiments over domestic and external developments adding more pressure on the peso,” he added. “We remain confident that the Philippine economy’s solid fundamentals will lend support to our flexible peso.”