Inflation seen to hit 7.1% in January

Inflation seen to hit 7.1% in January
By Des Ferriols
The Philippine Star 01/28/2006

The national average inflation in January may hit 7.1 percent and monetary officials said they expect domestic prices to continue rising during the first half of the year.

The Bangko Sentral ng Pilipinas (BSP) said yesterday the increase in the prices of basic commodities is likely to push the inflation rate to 6.4 to 7.1 percent this month.

BSP Governor Amando M. Tetangco Jr. told reporters yesterday that the increase in inflation rate would be due mainly to the movements in domestic pump prices resulting from the volatility in world oil prices.

According to Tetangco, high inflation is expected particularly during the early months of the year and especially after the government increases the expanded value-added tax (EVAT) rate from 10 percent to 12 percent.

"But during the latter part of the year, we expect some easing in domestic prices," Tetangco said.

BSP Deputy Governor Diwa Guinigundo said there were still no indications that the BSP’s Monetary Board would need to take action against rising inflation.

"Right now, based on domestic liquidity growth, it doesn’t look like we have to do anything," Guinigundo said. "We were expecting domestic liquidity to grow by at least 13 percent and we are now at only 11.9 percent."

However, Guinigundo said the MB is keeping an eye on geo-political developments that might trigger another volatile run in world oil prices which was still the biggest threat to inflation expectations in 2006 and 2007.

"The MB may opt to undertake future tightening if necessary depending on how quickly the risks will escalate," Guinigundo said. "Oil is the principal risk but we are also looking at domestic wages, liquidity growth and inflow from abroad."

For 2006, the BSP’s inflation target is five to six percent and it has revised its 2005 target to four to five percent.

Tetangco said the new 2007 inflation target was consistent with the growth target of 6.1 percent to 6.5 percent, with a gradually decelerating path towards lower inflation rate.

The inflation target is set by the government which the BSP uses to set its monetary policy direction over a two-year horizon. The publicly-announced inflation target is intended also to guide for public’s expectations, and allow more predictable planning.

Tetangco said that the Monetary Board saw the balance of economic evidence that still supported an unchanged policy setting. "This is based on the prevailing combination of generally favorable supply and demand side factors," he said. "In particular the recent easing of energy prices, strengthening of the peso and the on-going harvest season in a relatively normal weather."

Depending on how fast the BSP intends to usher the national average inflation rate, the MB would have to position its monetary policies if the reduction will remain at its steep trajectory.