BSP remains watchful on inflation risks

Bangko Sentral ng Pilipinas (BSP) Governor Amando M. Tetangco Jr. yesterday said they are closely watching out for possible second round effects to inflation that could come from the external side.

“We will continue to monitor price movements, including emerging second round effects from global oil prices,” said Tetangco. He added that “any shifts in global growth prospects” are closely scrutinized as these impact domestic growth and inflation dynamics.

“(We will) see if there is need to make any adjustments in policy levers,” said Tetangco.

These second round effects to core inflation are price shocks coming from wage increases and transportation costs. The core inflation excludes certain food and energy items to better capture underlying price pressures. The inflation rate that is reported is the headline inflation.

Typically, according to methodologies used by the International Monetary Fund, central banks such as the BSP accommodate “first round” effects such as rising food prices but responds to second-round effects.

As for the low February inflation turnout of 0.9 percent, which is at the low end of the BSP forecast for the month of 0.9 percent to 1.7 percent, the BSP chief noted that slower inflation was caused by declines in housing, utilities, gas and transport costs.

Tetangco has said that their assessment of monthly inflation forecasts continue to show a gradual rise this year until 2017. The balance of risks seem to suggest that, in their view at least, that the monthly inflation will “slowly rise to within the target range for 2016 and 2017.”

Upside risks continue to emanate from a stronger-than-expected El Niño and potential adjustments in electricity rates given pending petitions, said Tetangco earlier.

During its most recent policy meeting, the BSP cut its inflation forecasts for 2016 in view of the peso depreciation versus the US dollar. It now expects a 2.2 percent average for 2016 from 2.4 percent. For 2017, they estimate inflation to average at 3.2 percent.

"It is a bit of an unexpected drop," said Vaninder Singh, economist at Royal Bank of Scotland in Singapore, adding that