The country’s annual headline inflation rate climbed to 4.1 percent in April from 3.9 percent in March due to the faster pace of price increases in food, non-alcoholic beverages, housing, water, electricity, and fuel, prompting the central bank to hint of “preemptive adjustments” in its policy levers.
In April last year inflation was recorded at 2.6 percent, according to the Philippine Statistics Authority (PSA).
Despite the rise this year, the inflation rate remains within the 3.6 percent to 4.5 percent range forecast by the Bangko Sentral ng Pilipinas (BSP) for April. The figure also indicates that inflation should remain within the central bank’s 2014 target band of 3 percent to 5 percent, BSP Governor Amando Tetangco Jr. said on Tuesday.
The latest PSA data showed that in Metro Manila, the annual inflation rate in April advanced to 3.3 percent from 2.9 percent in March. In areas outside Metro Manila, the pace of annual inflation also inched up to 4.3 percent in April from 4.2 percent in March.
“We remain watchful for any financial stability risks from the still elevated liquidity growth rate, and continue to monitor the impact of our last action which took effect only mid last month, as well as developments globally that could affect domestic inflation dynamics,” Tetangco said in a text message to reporters.
The BSP governor was referring to the Monetary Board’s March 27 decision to increase banks’ reserve requirement ratio (RRR) by one percentage point to 19 percent effective April 11. The move was intended to help guard against potential risks to financial stability that could arise from the recent rapid growth in domestic liquidity.
Tetangco said that the central bank will not hesitate to make preemptive adjustments to any of its policy levers at a measured pace if the inflation target for the year would be at risk or pressures to financial stability heighten.
Meanwhile, Standard Chartered Bank economist Jeff Ng said that Tetangco’ statement is in line with their view that the BSP will continue to tweak the reserve ratio of banks while keeping policy rates unchanged.
“We expect a 1-percentage point increase in the RRR to 20 percent on Thursday. Inflation still remains around the midpoint of the inflation target. We expect inflation to be on an uptrend in the second quarter compared to the first quarter, where inflation averaged 4.1% percent,” he said.
Standard Chartered Bank also expects the central bank to hike its overnight borrowing rate to 3.75 percent in the third quarter of the year before raising it to 4 percent at the yearend. It also expects the interest rate for special deposit accounts to rise from 2 percent to 2.25 percent and to 2.50 percent for the third and fourth quarters of the year, respectively.
On the other hand, despite the higher inflation turnout in April, the National Economic and Development Authority (NEDA) expects the movement of prices of basic commodities to be manageable in 2014.
“In the absence of major economic shocks, NEDA expects the country’s headline inflation rate in 2014 to average around 4 percent. This is within the government’s target of 3 percent to 5 percent as set by the NEDA Board-Development Budget Coordination Committee,” said Economic Planning Secretary Arsenio Balisacan.
Balisacan explained that economic activity in the Philippines will remain strong despite global concerns on the sustainability of growth in emerging economies.
“Our economic activity will go forward, supported by sound macroeconomic fundamentals, favorable consumer and business sentiment, and manageable inflation,” he said.
The NEDA chief also said that the government needs to concentrate in addressing the upside risks to inflation, especially of food, to ensure that government measures would support economic growth.
Balisacan said these risks include potential increases in food prices that may emanate from weather disturbances such as El Niño, the depreciating peso, and pending petitions for further adjustments in utility rates, transport fares, and wages.
“In the short term, the interventions can focus on improving the management of inventory, including that of imports, and the efficiency of the distribution systems. In the medium term, we need to focus on increasing the productivity of agriculture and the food processing industries as well as expanding production capacity,” he said.