Unanticipated swings in food and fuel prices prevented the Bangko Sentral ng Pilipinas' (BSP) from achieving last year's inflation goal, central bank chief Amando M. Tetangco, Jr. said.
The BSP had wanted to keep inflation within a 3-5% range in 2008 but the full-year average ended up settling at 9.3%.
In an open letter to President Gloria Macapagal Arroyo dated January 26, central bank Governor Amando M. Tetangco, Jr. explained that the 2008 inflation target, set in November 2006, was anchored on a benign inflation outlook hinged on "lower oil prices, a stronger peso and generally stable food prices."
"The Philippine inflation environment in 2008 turned out to be more challenging compared to the BSP's assessment two years earlier," Mr. Tetangco said.
"Price pressures in the first half of the year had intensified more than first anticipated, principally due to the big surge in the international prices of oil and food."
The central bank issues an open letter to the President each time actual inflation fails to fall within target, ensuring its accountability to its mandate of maintaining price stability.
The open letter, the sixth since 2004, outlines the reasons for the missed goal as well as the steps the central bank will pursue to bring inflation towards the target.
The BSP adopted an inflation-targeting framework in January 2002.
Mr. Tetangco pointed out that price volatilities in the global market had spilled over to the Philippines, which saw inflation enter double-digit territory in June 2008 and peaking at 12.4% in August.
The central bank traced the volatility to adverse weather conditions and widespread commodities speculation on the back of a weak US dollar.
Supply issues coupled with increasing demand from emerging market economies, meanwhile, drove up oil prices, which reached an all time high of $147 per barrel in the middle of last year.
Food prices similarly soared on account of "strong demand for commodities used in biofuel production as well as rising fuel and fertilizer costs," translating to "unprecedented increases in domestic rice prices". "Because of the magnitude and the unexpected nature of the global shocks, both inflation targeting and non-inflation targeting central banks alike breached their respective 2008 inflation targets," Mr. Tetangco pointed out.
The central bank, which was criticized for being "behind the curve" in terms of responding to soaring inflation, argued that rate hikes were warranted only when volatilities become protracted, translating to higher wages and affecting the broader economy.
Monetary authorities raised policy rates by a total of 100 basis points from June to August last year.
In December of last year, it delivered a half-percentage point rate cut on signs of easing inflation and mounting threats of an economic slowdown.
Last Thursday, the policymaking Monetary Board followed through by bringing the overnight borrowing rate to 5% via another 50 basis point cut.
"The positive developments in the prices of commodities and the recent string of low inflation numbers should significantly relieve inflationary pressures and keep the public's inflation expectations well anchored," the BSP letter read.
"Moreover, prospects of weaker world economic activity are expected to dampen demand, reducing price pressures."
Even as inflation becomes less of a headache this year, Mr. Tetangco did not rule out further loosening in monetary policy in order to push banks to free up cash needed to shore up the economy.
The central bank's revised inflation forecast is 3.9% for this year and 4.7% for 2010, within its target of 3.5% and 4.5%, give and take one percentage point, for 2009 and 2010, respectively.
"Under this scenario, the BSP will continue to carefully consider opportunities to ease monetary policy, mindful of any potential tightening credit conditions," the central bank chief said.