BSP sees inflation declining to 4.3-5%

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Posted: 0:29 AM | Apr. 17, 2006
Doris C. Dumlao
Inquirer

Published on Page B7 of the April 17, 2006 issue of the Philippine Daily Inquirer

 

THE BANGKO SENTRAL NG Pilipinas sees the country's inflation rate easing to 4.3-5 percent by next year despite the possibility of a continuing rise in global oil prices, official documents showed.

 

The BSP's latest official forecasts indicated the reduction in the inflation target range starting 2007 would be brought about by the expected continued stability of the peso-dollar exchange rate and the softening of domestic interest rates.

 

"The 2007 forecast is premised on the one-off effect of the reformed value added tax reform (RVAT)," BSP Deputy Governor Diwa Guinigundo said.

 

"The increases in crude prices have already been assumed in earlier forecast. The risks remain except that RVAT will lose steam," Guinigundo said.

 

For this year, the latest inflation rate projection of the inter-agency Development Budget Coordination Committee was a range of 7.3-7.9 percent, overshooting the original target of 4-5 percent.

 

The higher-than-target inflation forecast for this year took into account the hike in the VAT rate from 10 to 12 percent starting last February, as well as the assumption that Dubai crude prices will hit $62 per barrel, up from last year's average of $49.31 per barrel.

 

For next year, the government expects Dubai crude prices to average even higher at $63.36 per barrel.

 

"One risk is the geopolitical tension in Iran, the deterioration of which may result in the disruption of oil supply as Iran produces 4 million barrels of oil a day," a DBCC report said.

 

Another factor driving the tightness of petroleum products supply in the country is the shortage in local refining capacity, the report added.

 

"Improving yields from the Malampaya gas field does not lessen the nation's dependence on imported petroleum products. Malampaya's output has a very high level of metal content which cannot be processed by local refineries," it noted.

 

The Philippines imports 67 percent of its finished oil products requirement and only 33 percent was being refined locally, the DBCC report noted.

 

The BSP assumed that the peso-dollar rate would remain stable at 51-53 to $1 from this year to 2010. The strong peso, despite some trade-offs in terms of shrinking export margins, is seen to temper increases in the country's inflation rate through the reduction in the import bill.

 

For 2008 to 2010, the BSP expects the inflation rate to range even lower at 3-4 percent.

 

The softening of domestic interest rates is expected to further ease the pressure on inflation.

 

For this year, the BSP projects interest rates based on the 91-day Treasury bill rate to range at 6.8-7.4 percent.

 

T-bill rates for next year are seen to stabilize at 4.8-5.5 percent and remain steady at 4.5-5.5 percent over the medium term until 2010.

 

A BSP assessment indicated that the recent increases arising from the VAT rate adjustment should taper off in the second semester.

With INQ7.net