Despite the drop in global oil prices, which could trigger disinflation or a sharp slowdown in the rise of consumer prices, the central bank is confident the Philippines’ headline inflation will stay within target, set between 2 percent and 4 percent this year.
In his keynote speech during the 2015 Economic Journalists Association of the Philippines Board Induction Ceremony over the weekend, Bangko Sentral ng Pilipinas (BSP) Governor Amando Tetangco Jr. said the global impact of significant declines in international oil prices will vary in scope and direction.
Low oil prices represent disinflation pressures for oil-importing countries such as the Philippines, which already saw inflation slowing in recent months, he said.
Headline inflation clocked in at 2.4 percent in January, decelerating from 2.7 percent in December, the slowest pace in 17 months.
“Many have wondered why, given it has already lowered its own inflation forecasts for 2015 and 2016, the BSP stood pat on its policy rates and didn’t follow the other central banks that had earlier eased their policy settings,” Tetangco said.
In its first policy meeting for the year early this month, the Monetary Board cut its inflation forecast to 2.3 percent for 2015 from 3 percent previously and trimmed to 2.5 percent from 2.6 percent the forecast for 2016.
Tetangco, who chairs the seven-man board, cited two reasons for the revision: First, the disinflation risk appears low for the Philippines and, second, the central bank remains watchful of developments that may impact on prices.
“First, unlike (what’s happening) in some economies, the risk of inflation is falling below zero . . . or to negative levels in the Philippines . . . In fact, while our latest forecasts show a lower inflation path, we expect inflation to stay within the government’s target range over the policy horizon,” he said.
Tetangco added that the inflation outlook is supported by firm demand conditions in the Philippines.
Citing the central bank’s latest expectations surveys, he said the market sentiment is broadly favorable and should, in turn, drive up spending and investment.
Wage levels, potential increases in utility rates, and possible power shortages also lead to expectations that inflation is likely to remain positive instead of reaching or falling below zero, he added.