BSP sees Feb inflation at 8%
By Des Ferriols
The Philippine Star 03/01/2006
The Bangko Sentral ng Pilipinas (BSP) said yesterday the increase in the value-added tax (VAT) rate and the high cost of oil and oil products would bring February’s average inflation rate to almost eight percent.
Projections made by the BSP based on initial indicators of February prices showed that the average inflation rate would range between 7.6 percent and 7.9 percent.
BSP Governor Amando M. Tetangco Jr. said inflation may be higher in February "due to one-off price adjustments following the increase in the value-added tax rate, still high oil prices and moderate rise in food prices."
"The increase in inflation is consistent with earlier projection of a pick up in the first half," Tetangco added.
The VAT rate increase from 10 percent to 12 percent became effective in February and monetary officials said this would cause a one-time surge in domestic prices for VAT-covered products.
Tetangco told reporters that prices were also pushed up by surging oil prices as well as a moderate increase in food prices.
Although basic agricultural products are exempted from the VAT, the consumer price index also includes fuel costs as well as processed foods and shelter.
Despite the surge in the inflation rate in February however, Tetangco said the increase was still within expectations.
"Its only consistent with our earlier projections of a pick-up in inflation rate during the first half of the year," Tetangco said. "We don’t expect inflation rate to decelerate until the second half of the year."
The BSP uses the inflation rate to determine its monetary policies in terms of how much liquidity it intends to keep in the system or to mop-up.
However, policy actions have a lag-time of at least 18 to 20 months which meant that everything the monetary board could do about this year’s inflation rates have already been done a year or so ago.
Although the BSP has already conceded that it would miss its inflation target in 2006, Tetangco said the target for 2007 was still four to five percent. This indicates that the BSP would either take an aggressive stance to curb inflation and bring it down drastically by 2007 or take a softer stance to bring it down slowly.
"It’s a matter of trajectory," Tetangco explained. "If inflation is high this year and we want to bring it down to the target level by 2007, then the stance would be more aggressive."
However, Tetangco said the inflation rate for the whole of 2006 is not expected to be far from the target. "We have already projected that the 2006 target will be breached but 2007 is a different matter."
Tetangco said there would be more inflationary pressure towards June since prices normally move up at the end of the school year and right before schools reopen.
"After that, we expect prices to slowdown," he said.
A higher inflation rate may prompt the BSP to raise its key overnight interest rate, discouraging borrowing and investment. The government expects the economy to grow as much as 6.3 percent this year, faster than 2005’s 5.1 percent.
The BSP’s key rate has been kept steady since November, after it wsa raised by a quarter-point to 7.5 percent on Oct. 20. Similar increases were made on Sept. 22 and April 7, before which the rate at which the BSP borrows money overnight from commercial lenders was at a 13-year low. The Monetary Board will next meet on March 9.
http://www.philstar.com/philstar/NEWS200603010703.htm
By Des Ferriols
The Philippine Star 03/01/2006
The Bangko Sentral ng Pilipinas (BSP) said yesterday the increase in the value-added tax (VAT) rate and the high cost of oil and oil products would bring February’s average inflation rate to almost eight percent.
Projections made by the BSP based on initial indicators of February prices showed that the average inflation rate would range between 7.6 percent and 7.9 percent.
BSP Governor Amando M. Tetangco Jr. said inflation may be higher in February "due to one-off price adjustments following the increase in the value-added tax rate, still high oil prices and moderate rise in food prices."
"The increase in inflation is consistent with earlier projection of a pick up in the first half," Tetangco added.
The VAT rate increase from 10 percent to 12 percent became effective in February and monetary officials said this would cause a one-time surge in domestic prices for VAT-covered products.
Tetangco told reporters that prices were also pushed up by surging oil prices as well as a moderate increase in food prices.
Although basic agricultural products are exempted from the VAT, the consumer price index also includes fuel costs as well as processed foods and shelter.
Despite the surge in the inflation rate in February however, Tetangco said the increase was still within expectations.
"Its only consistent with our earlier projections of a pick-up in inflation rate during the first half of the year," Tetangco said. "We don’t expect inflation rate to decelerate until the second half of the year."
The BSP uses the inflation rate to determine its monetary policies in terms of how much liquidity it intends to keep in the system or to mop-up.
However, policy actions have a lag-time of at least 18 to 20 months which meant that everything the monetary board could do about this year’s inflation rates have already been done a year or so ago.
Although the BSP has already conceded that it would miss its inflation target in 2006, Tetangco said the target for 2007 was still four to five percent. This indicates that the BSP would either take an aggressive stance to curb inflation and bring it down drastically by 2007 or take a softer stance to bring it down slowly.
"It’s a matter of trajectory," Tetangco explained. "If inflation is high this year and we want to bring it down to the target level by 2007, then the stance would be more aggressive."
However, Tetangco said the inflation rate for the whole of 2006 is not expected to be far from the target. "We have already projected that the 2006 target will be breached but 2007 is a different matter."
Tetangco said there would be more inflationary pressure towards June since prices normally move up at the end of the school year and right before schools reopen.
"After that, we expect prices to slowdown," he said.
A higher inflation rate may prompt the BSP to raise its key overnight interest rate, discouraging borrowing and investment. The government expects the economy to grow as much as 6.3 percent this year, faster than 2005’s 5.1 percent.
The BSP’s key rate has been kept steady since November, after it wsa raised by a quarter-point to 7.5 percent on Oct. 20. Similar increases were made on Sept. 22 and April 7, before which the rate at which the BSP borrows money overnight from commercial lenders was at a 13-year low. The Monetary Board will next meet on March 9.
http://www.philstar.com/philstar/NEWS200603010703.htm
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