BSP: Inflation risks ‘broadly balanced’
Credit to Author: MAYVELIN U. CARABALLO, TMT| Date: Fri, 18 Jan 2019 16:30:00 +0000
Risks to the 2019 inflation outlook are broadly balanced and consumer price growth is expected to return to target after last year’s surge, the Bangko Sentral ng Pilipinas (BSP) said on Friday.
Discussing the central bank’s Fourth Quarter Inflation Report, BSP Department of Economic Research director
said latest baseline forecasts indicated that inflation had started to ease and would end the year within the 2.0-4.0 percent goal.
“The BSP’s review of current inflation dynamics suggests that the risks surrounding the inflation outlook is broadly balanced in 2019…,” Lapid told reporters.
The BSP’s policymaking Monetary Board has decided to cut its inflation forecast for 2019 to 3.1 percent, from 3.5 percent previously, due to global crude price drops, lower-than-expected inflation results as 2018 ended, the estimated impact of rice tariffication and the cumulative impact of monetary policy adjustments.
During the briefing, Lapid said that higher electricity rates, faster-than-expected monetary policy normalization in advanced economies, and a proposed increase in the sin taxes of alcoholic beverages were the main upside risks to inflation.
The BSP noted in the inflation report that there were various petitions for rate adjustments by Manila Electric Co. (Meralco) and Power Sector Assets and Liabilities Management Corp. (Psalm).
Meralco’s petitions include generation and transmission charges, system loss, lifeline subsidy, a December 2013 rate adjustment that is the subject of Supreme Court temporary restraining order, and a P0.65-per kilowatt hour adjustment for the January 2014 billing period that still has to be approved by regulators.
Psalm’s petitions, meanwhile, cover adjustments for fuel and foreign exchange costs.
The Bangko Sentral pointed out that faster-than-expected monetary policy normalization in the US and other advanced economies could lead to tighter global liquidity conditions and the repricing of risks.
“Consequently, the higher federal funds rate could result in portfolio outflows and higher risk premia, leading to a weaker peso and higher inflation over the policy horizon,” it added.
The BSP also pointed to a draft bill seeking to raise the sin taxes on alcoholic beverages, which account for 0.7 percent of the consumer price index basket, that is part of Package 2 Plus of the government’s Comprehensive Tax Reform Package.
Under the proposed bill, specific taxes on distilled spirits, wines, and fermented liquor specified in the Sin Tax Reform Act of 2012 would be raised in addition to a higher annual indexation of 7.0 percent from 4.0 percent previously.
The main downside risks to inflation, meanwhile, are protectionist policies in advanced economies and geopolitical tensions, along with potential renegotiation on concessions for lower tariffs on meat.
“The continued policy uncertainty, spillovers from tighter global financial conditions, and geopolitical tensions could lead to slower global trade and economic activity on the whole, thereby leading to potential downward price pressures,” the central bank said in the report.
It stressed that increased protectionist measures in key economies remained a major risk to the global growth outlook and trade activity. Global demand, it pointed out, could be undermined by heightened uncertainty over trade policies, especially between the US and China.
“On the basis of new information in the fourth quarter, the BSP now has some latitude to allow the monetary policy adjustments throughout 2018, including the cumulative 75-basis-point hike in September and November, to work their way through the traditional channels of monetary policy,” Lapid said.
“Nonetheless, the BSP remains vigilant against developments that could affect the outlook for inflation and financial stability, including those emanating from external forces such as tighter global financial conditions and lingering geopolitical risks,” he added.
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