Early signs show gov’t may miss 2007 inflation target

Early signs show gov’t may miss 2007 inflation target
By Des Ferriols
The Philippine Star 01/30/2006

After conceding early on that it would miss its 2006 inflation target, the Bangko Sentral ng Pilipinas (BSP) said over the weekend it is likely that the 2007 inflation target will be breached as well.

The BSP said there would be a "slight breach" in the government’s 2007 inflation target of four to five percent although monetary officials said there was still time and opportunity to take steps to contain the breach.

BSP Deputy Governor Diwa Guinigundo told reporters that the projections made by the BSP’s Department of Economic Research (DER) only estimated price movements assuming that the BSP did not take any steps to curb inflation.

"If we decide not to do anything then there could be a slight breach," Guinigundo said. "But at this point there is still time, we can still take steps."

According to Guinigundo, the fluctuations in the world oil prices still posed the biggest risk to inflation, considering the shifting geo-political conditions that could further tighten global oil supply.

"The Monetary Board may opt to undertake future tightening of its monetary policies if necessary, depending on how quickly the risks will escalate," Guinigundo said.

For 2006, the government’s inflation target was at 5-6 percent and it has been conceded that this target will be breached given the skyrocketing oil prices in 2005.

Since monetary policies take at least 18 months to filter through the system, BSP actions this year would only impact inflation in 2007.

The 2007 inflation target has already been adjusted from the original target of 3-4 percent after monetary officials decided the original range had become unrealistic.

In its first policy-setting meeting this year, the MB decided to hold its policy rates steady but Guinigundo said the rest of the year was still wide open.

"There is more than one factor to consider although oil prices pose the principal risk," Guinigundo said. "We are also looking at liquidity levels and inflows from overseas Filipino workers, equity investments and portfolio investments."

At the moment, Guinigundo said the BSP was assuming a growth rate of 10 percent for OFW remittances and if this growth rate turns out faster than anticipated, it could be necessary for the BSP to review its open market operations.

"We adjust that constantly anyway," he stressed. "But at the moment, our liquidity growth rate is even below our assumed rate of 13 percent. we’re somewhere at 11.9 percent only."

The 2007 scenario, however, would dictate how aggressive the BSP would be in its policy-setting this year.

"The downside factors are still oil prices and since we have assumed a certain wage hike, any increase beyond that assumption will have to be carefully assessed," he said.