BSP says ready to tweak rates when needed

THE BANGKO SENTRAL ng Pilipinas (BSP) is prepared to tweak interest rates to contain inflation pressures and navigate “challenging” markets this year, its chief said, while noting that a flexible exchange rate also lends support to the economy.

BSP Governor Nestor A. Espenilla, Jr. said the central bank remains watchful of price conditions following the implementation of the first tranche of the gov- ernment’s tax reform program, even as it believes full-year inflation will not go beyond four percent.

“We expect inflation to remain within target range until 2019, ” Mr. Espenilla said in a speech before the Rotary Club yesterday.

“However, further increases in global crude oil prices may result in inflation trending in the upper bracket of the target range,” he added.

“[ W] ith these tax changes in mind, BSP looks out for possible price spirals. You can count on us to timely adjust the monetary policy stance to ward off any threat to our inflation target.”

The tax reform law — Republic Act No. 10963 — reduces personal income taxes for those earning below P2 million, alongside a simpler system for computing donor and estate taxes. Foregone revenues will be offset by the removal of some exemptions from value-added tax as well as higher levies for fuel, cars, tobacco, coal and sugar-sweetened drinks, among others.

BSP Deputy Governor Diwa C. Guinigundo has said monetary authorities expect higher excise taxes to add “less than one percentage point” to inflation this year.

The BSP expects 2018’s full-year average at 3.4%, coming from a 3.2% estimate for 2017.

The Monetary Board has kept its policy stance unchanged since September 2014, citing manageable inflation and firm domestic demand.

RISK OF TOPPING INFLATION TARGET

Monthly inflation could overshoot the BSP’s target range this year on the back of higher duties on basic goods, economists said in a Business World poll late last week, even as they noted that price pressures would not immediately trigger rate hikes.

Rajiv Biswas, chief economist for Asia-Pacific at IHS Markit, said he expects higher taxes to push inflation to the top of the 2-4% target range by mid-2018.

“However, since the increases in indirect taxes will have a temporary impact on the headline inflation rate and drop out of the CPI calculation after 12 months, the BSP is expected to look through this temporary factor when assessing the inflation outlook its monetary policy decision,” Mr. Biswas said of the consumer price index.

On the flip side, another analyst said faster inflation could prompt multiple rate adjustments from the BSP just to contain its impact.

“[T]he risk of inflation overshooting the BSP’s 2-4% target is fairly high. Some of these pressures are obviously coming from the tax reform but we think it will be difficult for BSP to look through these risks at a time when growth continues to power ahead, the output gap is already positive and overheating concerns are more widespread,” Nomura economist Euben Paracuelles said, adding that he expects four rate increases from the BSP this year.

Mr. Espenilla acknowledged “transitory” price pressures as the higher taxes kick in, but noted that they expect productivity gains from additional public spending that will be funded by fresh revenues to be a net plus for the Philippine economy.

‘APPROPRIATE MEASURE’

The BSP chief also assured that the regulator is ready to “deploy appropriate measures” and regulations to prevent overheating, which has been flagged as a concern by external observers as credit growth hangs at double-digit levels.

“While the coming year is likely to bring continued challenges for the Philippines, we are well-placed to deal with these challenges,” Mr. Espenilla said.

“The country’s firm growth momentum and manageable inflation environment provide ample space to respond appropriately to evolving domestic and global conditions.”

The Philippine economy is expected to grow by 7-8% annually until 2022, supported by robust household consumption and aggressive public spending on infrastructure via the “Build, Build, Build” program.

Keeping a flexible exchange rate also provides extra support for the local economy, Mr. Espenilla said, as he clarified that the monetary authority does not target the pesodollar rate.

“Maintaining a flexible and market-determined exchange rate can better insulate our economy from external shocks that could disrupt the pace of economic growth,” the central bank chief added.

Economic managers expect the peso to trade between P49-52 against the greenback from 2018 to 2022, weaker than the previous P48-51 forecast range. The peso hit 11-year-lows in late 2017 to peak at P51.77-per-dollar, before closing at P49.93 on Dec. 29, the year’s last trading day.