BSP expects inflation to drop to as low as 3.9% this year

By Des Ferriols Updated January 31, 2009 12:00 AM

Amando M. Tetangco, Jr. , Governor of the Bangko Sentral ng Pilipinas

After surging to double-digit levels in 2008, monetary officials said they expect the nationwide inflation rate to drop to as low as 3.9 percent this year and rise slightly to 4.7 percent in 2010.

The latest projections from the Bangko Sentral ng Pilipinas (BSP) indicated that the prices of basic commodities would not rise as much in the next two years, mainly because the economy is slowing down.

As early as November, the inflation rate had already begun to decline much faster and a lot sooner than monetary officials originally expected. By December, the rate had gone down to eight percent, bringing the full-year average to 9.3 percent.

In January, the BSP projected that price increases in basic commodities would slow down even more, bringing the inflation rate down to as low as seven percent — a full percentage point lower than the

previous month.

BSP Deputy Governor Diwa Guinigundo told reporters that the national average inflation rate would come down to within the target range of 2.5 percent to 4.5 percent in 2009 and 3.5 percent to 5.5 percent in 2010.

“These numbers are based on information that are available to us at this point, over time as the monetary board meets every six weeks, these forecast will be revised accordingly to reflect the developments in supply and demand conditions,” Guinigundo said.

According to Guinigundo the 2009 and 2010 projections factored in the decline in oil prices and food prices, the relative stability of the foreign exchange rate and the fact that inflation expectation remained anchored.

The overall decline in inflation had already allowed the BSP to cut its overnight lending and borrowing rates by 50 basis points and the market is expecting another 50-point cut going forward.

According to Guinigundo, the BSP paid particular attention to the massive pull-out of foreign portfolio investments from the Philippine market in 2008 which left a net outflow of $1.4 billion compared with the $3.5-billion net inflow in 2007.

“A lot of foreign investments have been pulled out but despite the withdrawal, we see relatively ample liquidity in the system,” Guinigundo said. He said this was the reason why the BSP’s rate cut was pre-emptive rather than reactive.

“As the global tightness in the market continues, we want to ensure that we would avoid such tightness in the market,” Guinigundo said. “This way, both the banks, corporate borrowers and individual borrowers are assured by the presence of liquidity in the market.”

Guinigundo said the BSP hoped that the rate cut would help moderate the cost of borrowing which would encourage lending. More lending meant more funds going through the system that would be spent and spur economic activity.

Monetary officials’ chief worry is the expected slowdown in consumption spending which has been fueling the country’s economic growth since the government started aggressively supporting labor exportation in lieu of domestic job creation.

But Guinigundo said falling interest rates would ease liquidity supply further that he said would benefit savings and investments and over the longer term, the pace of economic activities.