Economy weathers pressures

The inflation rate is accelerating but it remains within manageable levels because the economy is strong enough to absorb price pressures.

British bank Standard Chartered said in a recently-published report that it expects inflation to rise from 3.5 percent in the fourth quarter of 2013 to 3.9 percent in the first quarter of 2014.

It said inflation would further accelerate to 4.2 percent in the second quarter, 4.3 percent in the third quarter, before falling to 3.3 percent in the last quarter.

“Inflation is likely to peak in Q3, but remain below the 5 percent upper end of Bangko Sentral ng Pilipinas’ CPI inflation target. We therefore expect policy rate hikes only in Q3 and Q4 this year, by a total of 50 bps [basis points] to 4 percent by end-2014,” the bank says.

The Bangko Sentral ng Pilipinas earlier said inflation rate in 2014 would hover in the range of 3 percent to 5 percent. The projection was similar to that of 2013, when price increases at an average of 3 percent, the lower end of the target.

But with the imminent uptick in inflation in the middle of this year, Bangko Sentral Governor Amando Tetangco Jr. said the bank had “policy space to respond to this and will make policy adjustments as needed.”

The inflation rate average of 3 percent in 2013 marked the fifth consecutive year that it remained within the official target since 2009. With inflation environment at a manageable level, the Monetary Board of the central bank in its Dec. 12 meeting decided to keep policy interest rates at 3.5 percent for overnight borrowing and 5.5 percent for overnight lending.

The board noted that the balance of risks to the inflation outlook remained tilted slightly toward the upside due to potential increases in food prices as well as possible further adjustments in power rates.

“Baseline forecasts indicate that inflation will likely settle within the inflation target ranges for 2014 and 2015. Underlying demand-side pressures continue to be manageable, while inflation expectations remain firmly anchores,” the board says.

The board said the period of strong liquidity growth was not expected to translate into a significant inflationary pressure given the temporary nature of the adjustments related to the central bank’s new guidelines banning the access of investment management accounts to the facility starting Jan. 1 this year.

The Bangko Sentral in May said only funds in trust accounts and unit investment trust funds would be allowed access to the facility beginning this year.

It said the operational adjustments in the SDA facility was the main reason why domestic liquidity grew 36.5 percent in November year-on-year.

However, as of end-December, latest data showed that money supply growth eased to 32.7 percent year-on-year, reaching P6.936 trillion from P5.227 trillion a year ago.

The Bangko Sentral said it expects the normalization of M3 growth over the coming months following the completion of adjustments in the SDA facility.

Weak peso

Standard Chartered does not see a weaker Philippine peso pushing up inflation rate this year, prompting it to maintain its earlier inflation forecast of 3.9 percent for 2014.

“The Philippine peso has been the worst-performing Asian currency relative to the US dollar so far in January, falling 1.86 percent year-to-date. However, we do not think this weakness will translate into domestic price pressures,” the bank said in a research report published on Jan. 28.

It said the Philippines remained a domestic market-oriented economy, with exports and imports equivalent to only 62.8 percent of the GDP in Q3-2013 [versus 158.9 percent for Malaysia]. It said the greatest impact of a weaker peso was likely to be on energy inflation, as Brent crude becomes more expensive in peso terms.

It said commodity price fluctuations had a greater impact on inflation than the peso alone. It said pure foreign exchange fluctuations alone do not appear to have led food and energy inflation.

It said in terms of overall headline inflation, changes in the peso on a year-on-year basis had little impact on inflation. It said when inflation rose substantially in 2007-08, it occurred before the peso moved, and was the result of higher international food prices.

“While we expect the Philippine peso to have some inflationary impact on the domestic economy, we do not see sufficient upside to cause the BSP any significant concern,” it said. 

In terms of components, Standard Chartered said the changes in peso were likely to have a greater impact on clothing and footwear, furnishing and household equipment, and restaurant/miscellaneous goods and services.

The peso weakened against the dollar by 7.53 percent last year, but the central bank said the decline remained on the average compared with those of other Asian currencies.

Last year, the Singapore dollar depreciated by 3.54 percent; Thai baht, 6.76 percent; Malaysian ringgit, 6.87 percent; Indian rupee, 11.47 percent; and Indonesian rupiah, by 21.47 percent.

Tetangco said the Bangko Sentral was closely monitoring the volatility of the peso and was ready to deploy the appropriate tools to ensure that the currency movement would not have inflationary effects.

He said the bank had tools available both in terms of monetary policy tools as well as macro-prudential measures. “The tools are there and if there’s a need to deploy anyone or any combination, and if the situation requires it, then we’re good,” he said.

Tetangco, however, said the foreign exchange rate remained within the range of movement by other Asian currencies. The peso closed its weakest level in more than three years at 45.37 to the US dollar on Jan. 27.

“The [peso] volatility still remains within range compared to other currencies in the region. The objective of the BSP is give exchange rate determination to the market, but we would be prepared to participate in foreign exchange trading if there is excessive volatility. So we want to minimize volatility. But the fundamental foreign exchange policy remains,” Tetangco said.

Tetangco said the movement of the peso remained among the major factors tackled during the Monetary Board’s meeting every six weeks.

“We consider everything, you know, like what’s happening abroad, what are the directions and magnitude of capital flows. Of course, all in relation to the inflation target. What is happening on the other sectors have an implication on future inflation,” Tetangco said.

The pass-through rate of exchange rate movement to the inflation, meanwhile, had gone down over the years because of gains in efficiency and productivity in the domestic economy. “We have efficiency coming out of liberalization, so there’s greater competition,” he said.

With inflation likely to go down in 2015, the International Monetary Fund said the Bangko Senbtral’s current policy stance remained appropriate at the moment.

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