Inflation Expectation in the Philippines

Noting the continued rise in oil prices and its impact on inflation expectations, the policy-making Monetary Board (MB) implemented another 25 basis points hike in the Bangko Sentral ng Pilipinas’ (BSP) policy rates Thursday.

The latest MB decision, the second in a row since last March, brought to 4.50 percent BSP’s overnight borrowing rate and to 6.50 percent the overnight lending rate.

BSP Governor Amando Tetangco Jr., in a media briefing, said developments in the movement of international oil prices continue to put the three to five percent inflation target for this year and the next at risk.

He cited that oil prices continue to increase due to strong global demand and concerns about supply gaps while “global non-oil markets also continued to tighten.”

Thus, inflation expectations by analysts and economists “show elevated inflation forecast for 2011 and higher expected inflation for 2012.”

Tetangco said “sustained price pressures and higher inflationary expectations could influence future wage and price outcomes.”

“With these considerations, the Board deemed it prudent to rein in inflation expectations further and contain second-round effects with a follow-through policy action,” he said.

Relatively, Tetangco stressed that the 50 basis points increase in the central bank rates is expected to continue to support economic growth.

He said the manufacturing sector’s capacity utilization remains above 80 percent while production loans continue to rise, “indicating the sustained pick-up in private investment.”

Consumer lending is also on the uptrend as proven by, among others, the rise in vehicle sales amid the rising cost of oil.

Tetangco said the Board also noted that while domestic liquidity and credit continue to expand in reasonable pace, “sustained strong foreign capital inflows warrant careful attention to ensure that they do not exacerbate domestic liquidity levels and fan inflationary pressures in the future.”

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