BSP wary on El Niño impact on prices

August CPI seen at 0.2%-1%

Improved growth and benign inflation continue to ease pressures on monetary policy to make a change, but the central bank is keeping a cautious eye on the El Niño dry spell impact on prices.

“Given the current operating environment, we can expect economic performance that is still strong, albeit more modest than the government’s full-year target,” Bangko Sentral ng Pilipinas (BSP) Governor Amando M. Tetangco Jr. commented yesterday. “With this outturn, there may be no need for any immediate recalibration of monetary policy settings.”

But, Tetangco cited of danger factors of the El Niño phenomenon to inflation upside risks. “The NEDA (National Economic and Development Authority) points to El Niño and external fragilities as potential risks to growth going forward,” he said.

The BSP has been noting of a stronger-than-expected El Niño dry weather conditions on food prices and utility rates. It was still not enough of a worry to effect an adjustment in policy stance.

Tetangco said that to manage the El Niño aggravation, the BSP has been coordinating with other government agencies in monitoring and assessing the weather condition, particularly its potential impact on output and the prices of vital goods and services.

For the month of August, he said Consumer Price Index (CPI) inflation may have dropped to a low of 0.2 percent to a flat one percent, from 0.8 percent in July, because of downward adjustments in power rates and base effects.

While inflation rate is way below the government target of two percent to four percent this year, the BSP chief said they expect consumer price index to rebound in 2016.

“(With the) second quarter growth (5.6 percent from five percent in the previous quarter) and the lag in monetary policy, there may be no need as yet to adjust policy,” Tetangco reiterated. “But we are on the lookout for developments in oil prices, manifestations of El Nino and financial market volatility.”

The BSP continues to monitor evolving price and output conditions to ensure price stability is still conducive to balanced and sustainable economic growth.

During its August 13 monetary policy meeting, the BSP’s Monetary Board has assessed that prevailing conditions still support current policy settings. It also decided that benign inflation outturns – due to favorable supply-side conditions – are largely transitory.

In the BSP’s most recent quarterly inflation report, it noted that private forcasters are in consensus with the BSP’s inflation outlook, and most think that with the decline in international oil prices, this would “likely outweigh” the effects of the dry spell, among other upside risks to inflation such as power supply shortage or election-related spending.

An El Niño phenomenon occurs when there is a 60 percent drop in rainfall resulting to abnormal warming of land and ocean surface.

The Philippine Atmospheric, Geophysical and Astronomical Services Administration or PAGASA has noted an El Niño phenomenon since December 2014 and in a recent report, expect the dry spell to last until early next year.

PAGASA officials have warned that the dry weather conditions – already affecting 79 provinces – could be at its worst this year.