Inflation seen at 7% this month

By Des Ferriols Updated January 30, 2009 12:00 AM

The Bangko Sentral ng Pilipinas (BSP) expects the nationwide inflation rate to drop to as low as seven percent this month as oil prices continued to stabilize and food prices eased after the holiday season.

The BSP said yesterday that the inflation rate is projected to slow down to seven to 7.9 percent in January and to continue dropping to an average of 5.5 percent for the whole of 2009.

The nationwide inflation stood at eight percent in December but according to BSP Governor Amando M. Tetangco Jr., the rate could drop by as much as one percentage-point this month.

“The expected further slowdown in inflation would have been due to lower domestic oil prices and the peso’s strengthening during the month,” Tetangco said.

However, Tetangco said the slowdown could also be tempered by the increases in the prices of major food items such as pork.

“The BSP will continue to closely monitor price developments to ensure our policy settings are responsive to evolving scenarios,” he said.

BSP Deputy Governor Diwa Guinigundo told reporters that the bulk of the slowdown in inflation was due primarily to the drop in oil prices towards the end of the year after rising to historic highs and causing the dramatic surge in prices in mid 2008.

“Of course the slowdown was also precipitated by the appropriate monetary policy moves that we had undertaken last year,” Guinigundo said, referring to the monetary tightening that the BSP made in early 2008.

Last year, the BSP hiked its key policy rates by a total of 100 basis points as inflation rate rose to over 12 percent because of rising oil prices and the consequent adjustment of wages and transport fare rates.

By December, however, the BSP had started to ease its monetary policies, cutting the key rates by 50 basis points, lowering its overnight borrowing rates to 5.5 percent and its overnight lending rates to 7.5 percent in an effort to stimulate the economy.

Based on the BSP’s projections, Guinigundo said the downside risks to inflation appeared dominant against upside risks at this point, indicating that inflation rate would continue to drop throughout the year.

“Even core inflation is coming down and that means the demand-side pressures are also easing,” Guinigundo said.

According to Guinigundo, the BSP saw upside pressures on inflation to come from the utilities sector where rates could be adjusted upwards, particularly in water and energy bills.

Guinigundo said the state-owned National Transmission Corp. (Transco) had a pending request for an adjustment in transmission rates and the water sector is also asking for a similar adjustment.

But Guinigundo said that with the decline in oil prices, these adjustments might no longer be necessary, thus removing further pressure on the prices of basic commodities.

“There is less ground for utility firms to ask for adjustments if oil prices would remain steady,” Guinigundo said.

On the other hand, Guinigundo said there are more compelling reason for the inflation rate to continue going down, particularly the steady decline in oil prices and the improvement in food supply which supported the stabilization of food prices.

“The global slowdown is also a factor that would ease demand and therefore support lower inflation all around,” Guinigundo added. “Fortunately, the foreign exchange rate is also not adding more pressure because it is steady also.”