MANILA – The Bangko Sentral ng Pilipinas (BSP) on Wednesday downplayed the recent uptick in inflation, but noted the risks of second-round effects if the acceleration turns out to be a trend.
In a text message, central bank governor Benjamin Diokno said the month-on-month acceleration of inflation in May was still not enough to be considered a trend.
“That cannot be seen as a significant deviation from the trend. One data point does not constitute a trend. That’s elementary,” he explained.
The Philippine Statistics Authority (PSA) reported inflation settled at 3.2 percent in May, the first pickup in seven months since inflation started to decelerate in October 2018.
“The 3.2 percent inflation rate in May is within BSP’s forecasts of 2.8 to 3.6 percent for the month of May. Looking ahead, we expect inflation to be in the neighborhood of 2.0 percent in the third quarter of 2019,” said Diokno.
“With world oil prices easing, we expect the annual inflation rate to be in the vicinity of 3.0 percent in 2019 and 2020,” he added.
Despite the risks
BSP Deputy Governor Diwa Guinigundo, however, flagged risks that the uptick would be prolonged and generate ripple effects.
“Basically the drivers of inflation remain on the supply side and therefore generally temporary,” he said in a separate text message.
“The only risk is when the uptick gets prolonged and starts generating second-round effects and higher inflationary expectations, especially in the face of the heavy catch up on public spending on infrastructure in the second half,” he explained.
The Economic Cluster Development (EDC) last month agreed on a “catch-up” strategy after the four-month delay in the passage of the 2019 budget.
Finance secretary Carlos Dominguez III noted the spending commitment of infrastructure agencies – the Departments of Public Works and Highways (DPWH) and Transportation (DOTr) – with an estimated combined amount of P803.1 billion is enough to cover the national government’s infrastructure target.
“But even with this one-month price gain, year to date inflation continues to be within the 2-4 percent inflation target,” said Guinigundo, as year-to-date inflation was recorded at 3.6 percent as of May.
Moving forward, Guinigundo said the latest figures will be considered by the BSP when it comes to monetary policy tweaks.
“On RRR, the governor has been quite categorical that the goal to reduce it to lower levels stays but the pace of the reduction will be governed by both data and evidence,” he said.
The Monetary Board announced on May 16 the reduction of the reserve requirement ratio (RRR) of universal and commercial banks by 200 basis points to 16 percent in three stages from May to July.
A week later, it announced on May 23 the cut in RRR of mid-sized banks to 6 percent from the current 8 percent, also in three stages from May to July.
“So BSP will continue to monitor key developments and indicators to guide the next steps moving forward,” said Guinigundo. (GMA News)
