Tax reform to slow down inflation in 'long run,' says BSP official

ABS-CBN News

Posted at Dec 22 2017 06:51 PM | Updated as of Dec 22 2017 07:17 PM

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MANILA - The tax reform law that President Rodrigo Duterte recently signed will slow down inflation in the long term, a Bangko Sentral ng Pilipinas (BSP) official said Friday as he allayed concerns over the expected rise in prices because of indirect duties.

Felipe Medalla, member of BSP's Monetary Board and the Development Budget Coordination Committee (DBCC), said the recently approved Tax Reform for Acceleration and Inclusion (TRAIN) law would have an anti-inflationary effect as infrastructure projects it is expected to fund would "reduce transportation costs and increase productivity."

"In the long run, TRAIN should reduce the inflation rate. However, initially, you’ll have the cost-push effect of the higher indirect taxes. Our models say that [inflation will be] at most 1 percent in 2018 and around half a percent in 2019," he told reporters.

Medalla also said there may be no need for a monetary policy response to the passage of the tax reform law because "if everyone believes that eventually inflation will settle down, there is no need to have monetary policy to respond to it."

Cash grants promised to indigents, who are expected to bear the brunt of higher prices of consumables will also cushion the initial negative effects of tax reform, he said.

He added that there is no need for a change in monetary policy because the government prioritized the lifting of quantitative restrictions on rice, which would make the price of local rice lower than its imported counterpart by P7.

"Rice alone will more than offset the negative effects of TRAIN," he said.

"The way it’s being timed, we will be among the few countries in the world to raise taxes and slower inflation slightly if the timing happens," he said.

Budget Secretary Benjamin Diokno, also a member of the DBCC, said the significant cut on income taxes could lessen the pressure to raise wages, which will also contribute to taming inflation.