BSP sees inflation on track as it picks up

INFLATION is expected to pick up in the months ahead — though still on target — on the back of prospective hikes in electricity tariffs and in the excise tax on oil products, as well as the proposed new tax on sweetened drinks, according to the minutes of last month’s central bank meeting during which it decided anew to hold off policy adjustments.

“The overall balance of risks surrounding the inflation outlook is seen to be tilted to the upside, with pending petitions for adjustments in electricity rates along with the proposed adjustment in the excise tax rates of petroleum products and the potential second-round effect on transport fares,” read the highlights of the Sept. 22 Monetary Board meeting that were published yesterday.

Electricity tariff and public transport fares have 4.51% and 7.81% weights, respectively, in the consumer price index (CPI) — the theoretical basket of widely used goods and services used to compute inflation rate.

The Bangko Sentral ng Pilipinas (BSP) last month kept its policy stance unchanged, citing manageable inflation and robust domestic activity that would keep the economy upbeat even amid a persistent slump in global trade.

The BSP kept policy settings at 3.5% for the overnight lending rate, 3% for the overnight reverse repurchase rate and 2.5% for the overnight deposit rate at its sixth review for the year, keeping operational tweaks that took effect in June as the central bank migrated to an interest rate corridor.

Inflation has so far averaged 1.6% from January- September, just below the central bank’s 1.7%

projected average for the full year and below the 2-4% target band for 2016. Central bank officials have said that inflation’s pace will likely pick up further after last month’s 2.3% reading that was the highest in over a year.

The central bank kept inflation forecasts unchanged at 2.9% for 2017 and at 2.6% for 2018 as of its September policy review.

The Finance department has drafted a comprehensive tax reform program — split into five packages — that will trim income taxes for both individuals and companies, although revenues to be foregone will be offset by higher taxes on select goods and services consumed by the rich and the middle class.

Main concerns for inflation are the plans to hike the excise tax on fuel products and to impose a new tax on sweetened drinks, the central bank said.

BSP Deputy Governor Diwa C. Guinigundo said last month that monetary authorities are pricing in a P6-per-liter increase in tax on oil products which they expect to be in place by 2017. The proposal includes imposing excise tax on diesel and kerosene, which are currently not covered under the 1997 Tax Code.

Still, Mr. Guinigundo said the central bank does not expect the proposed increased tax on oil products to push annual inflation beyond 4%.

NEW TAX ON SWEETENED DRINKS

A separate proposal to impose an excise tax on sweetened drinks is also expected to push commodity prices higher, particularly the food and non-alcoholic beverage segment that accounts for 38.98% of CPI.

“[ T] he proposed increase in taxes of sweetened beverages serves as a possible upside risk to inflation,” the Monetary Board said.

The House of Representatives Committee on Ways and Means has revived a proposal to impose an additional tax on sweetened drinks, describing it as more of a health measure than a revenueenhancer. If passed, this will be on top of the 12% value-added tax on such products.

Subdued global growth remains a damper on Philippine economic activity, the central bank said, even as it noted that firm domestic demand, buoyant business sentiment, ample domestic liquidity and planned higher public spending should be enough to sustain the economy’s expansion.

At the same time, “Philippine financial markets were largely influenced by key macroeconomic developments overseas which outweighed the impact of economic developments in the domestic front.”

A key offshore factor is the timing of a new interest rate hike in the United States after the increase in December last year that was the first in nearly a decade of near-zero levels. Anticipation of that event has been driving foreign funds out of emerging markets like the Philippines, especially this semester.

Analysts for now expect the BSP to stand pat on policy settings for the rest of the year, with the earliest move seen in mid2017. —