BSP: Expect inflation 'blips'

by Bianca Cuaresma, BusinessMirror

Posted at Aug 19 2014 09:11 AM | Updated as of Aug 19 2014 05:14 PM

MANILA, Philippines - While recognizing there will be inflation “blips” in the coming months, Bangko Sentral ng Pilipinas Governor Amado M. Tetangco Jr. on Monday disagreed with Trade Secretary Gregory L. Domingo that the average rate of price increases this year could breach government targets.

The anticipated unsteady path to inflation was Tetangco’s response on whether he shared Domingo’s view that inflation could breach the upper limit of the inflation target range as consequence of congestion at the ports of Manila.

Tetangco only said the path to inflation over the remaining months of the year was seen unsteady, marked by quick dips and rises as commodities prices reflect price pressures on key food items and on power rates.

The unsteady price footprint in the months ahead reflects the volatilities on certain food items and more a reflection of supply-side bottlenecks that hardly responds to monetary-policy adjustments. But BSP Governor Amando M. Tetangco Jr., however, quickly gave assurance that no matter the blips the average inflation for the year should still fall within the target of 3 percent up to 5 percent this year.

“There could be blips up and down in the inflation rate. But overall, on average, we believe inflation will be within target,” Tetangco said in an interview at the sidelines of the Quezon City Credit Surety Fund (CSF) launching.

The CSF is a key advocacy program of the BSP aimed at reducing the borrowing cost of those who normally would incur high interest charges from the big banks but who now stand to draw loans from participating lenders at significantly reduced rates.

At its last deliberations on the subject, the policy-making Monetary Board confirmed that risks to inflation this year remained skewed to the upside, with price pressures emanating from possible upticks in food prices and proposed adjustments in power rates.

Inflation in July approximated the ceiling of the target inflation for the year at 4.9 percent. This was the highest inflation rate on record for the past three years.

Asked on his views on the correlation of port congestion and accelerated commodities prices, Tetangco said since the delivery of goods was delayed as a result of the congestion problem, temporary tightness in supply may be expected.

“Once there is tightness in supply, there is some effect on prices,” Tetangco explained.

He also said it was hard to quantify the impact of port congestion on inflation.

Tetangco also played down the impact of exchange-rate adjustments on inflation that in the recent past has proven significant.

“Actually the impact of exchange rate pass-through on the inflation has been reduced quite significantly over the years….We have liberalized our trade regulations with less effect on inflation. There is some effect but it is no longer significant as before,” Tetangco said.

The pass-through rate pertains to adjustments in the inflation rate for each percentage change in the value of the local currency the peso relative to the US dollar.

The local currency have been trading back to the P43 territory starting last week after hitting the P44 zone in the previous week due to concerns in external events. The peso also reflected the movement of currencies in the region.

“We will allow the market to basically determine and we only participate in the foreign exchange market to smoothen sharp fluctuations,” Tetangco added.