BSP sees lower 2019 inflation

With or without excise tax on oil

With or without the suspension of the excise tax on fuel, inflation forecast for 2019 of 3.5 percent could still be brought down on the back of declining oil and rice prices, according to a senior Bangko Sentral ng Pilipinas (BSP) official.

“If this positive out turn in both global and rice prices continue, we expect lower inflation than 3.5 percent in 2019 and 3.3 percent in 2020. We should know the final forecasts by the time the Monetary Board meets for the last time this year on monetary policy,” said BSP Deputy Governor Diwa C. Guinigundo, currently enroute to Colombo, Sri Lanka for the Southeast Asian Central Bank or SEACEN Board of Governors meetings.

The last Monetary Board meeting this year, its eighth, is on December 13. For the past five policy meetings in a row, the BSP has raised key overnight rate by a cumulative 175 basis points (bps).

Guinigundo said the central bank – whose prime mandate is to ensure price stability – is not troubled if the government will implement the 12 per liter increase in excise tax on oil next year which would raise excise taxes on diesel to 14.50 per liter and 19 per liter for gasoline.

“We are not very concerned at this point should the excise tax on fuel is pushed through,” he said. “While suspending it could reduce inflation by 0.1 percentage point (ppt), its impact on public revenues and the ability of National Government to pursue infra and social spending could be large especially in what it could contribute to higher productive capacity.”

Guinigundo said the rice tariffication bills alone which was approved and the reconciled version ratified by the Senate last Wednesday, would be enough to pull inflation rate lower within the target band of two-four percent. “This is expected to slash inflation by 0.85 ppt especially nowadays when global rice prices have started to come down. More related to fuel, global oil prices have started to touch the $50 per barrel and therefore the impact of a temporary suspension could be very little,” he said.

Guinigundo added that these developments are all consistent with BSP’s previous pronouncements that inflation in 2018 derived more from the supply side — oil and rice prices. “Therefore (it’s) not expected to be persistent,” he said. “We decided to tighten monetary policy precisely to prevent the supply shocks from being propagated into second round effects like petitions for higher wages and transport fare and to ensure that inflation expectations remain well anchored.”

The five-time rate increase since May was also to calm markets, ease exchange rate volatility and re-anchor the elavated inflation expectations.

“When we do the next survey of market analysts and economists who have now the benefit of knowing the slowdown in both year-on-year and month-on-month inflation as well as the rice bill approval and the decline in both oil and rice prices, we are certain their own inflation expectations should show a downtrend,” said Guinigundo.

He added that the US Federal Reserve – whose own past actions and pronouncements have indicated rising US rates – is now also reevaluating economic conditions and future policy moves.

“(US Fed is now) concerned about the soft patches in their own economy and the potential impact of sustained monetary normalization. This time around, we should hear a different siren song that we don’t have to stuff our ears with wax,” said Guinigundo.

For 2018, the BSP forecasts inflation to average 5.3 percent. It announced last week its estimate for November inflation which was lower or as low as 5.8 percent to a high of 6.6 percent. Actual inflation for October was 6.7 percent, the same as September.

The BSP forecasts a lower November inflation due to the “sharp” drop in oil prices which was around the $80 per barrel in November to $50-level these days.

Besides the sharp decline in petroleum prices, the BSP cited the normalization of supply conditions in rice and other agricultural commodities, and the strengthening of the peso below 153:$1 as factors for the lower inflation estimates.

Last November 15, during the Monetary Board policy meeting where rates were increased by another 25 bps, the BSP revised its inflation forecast next year to 3.5 percent from its previous (September 27) estimate of 4.3 percent on account of passage of the rice tariffication bill and at the time, the government’s plan to suspend the 12 excise tax on fuel in 2019.

The 2020 inflation outlook is also revised lower to 3.2 percent from an earlier forecast of 3.3 percent.