Tetangco tells why he is more wary of dropping oil prices
Robust consumption and firm demand fueled by remittances will counter risks coming from falling oil prices particularly deflation, the central bank said.
In his keynote speech at the recently concluded Security Bank Economic Forum 2015, Bangko Sentral ng Pilipinas (BSP) Governor Amando Tetangco Jr. said the risk of deflation materializing in the Philippines is not significant but the monetary authority remains watchful of the developments in the oil market and its impact on the country’s growth.
Tetangco said the steep decline in oil prices has complicated the market appreciation of the outlook for monetary policy in 2015. For instance, he said Brent had lost half its value by end-2014, dropping from a high $115 per barrel to $55 per barrel.
The BSP governor said this new uncertainty from oil price movements heighten volatility in financial markets by unsettling investor risk appetite and unseating inflation expectations.
He explained a decline in oil price could also change the balance of global growth prospects, noting that there will be winners and losers if low oil prices persist.
“With overall global growth still fragile, the significant drop and the weak prospects in oil prices have gotten more analysts discussing the risk of deflation in recent weeks,” he said.
In the Philippine context, Tetangco said low oil prices represent disinflation pressures as fuel and fuel-related items account for nearly nine percent of the country consumer price index basket.
He also noted that the fall in oil prices translated to downward adjustment to transport, and benefits the economy through an increase in household real income as well as the lower cost of production.
“I have been asked whether we are worried about deflation (due to the substantial decline in oil prices). Well, deflation effects in the advanced economies can spillover to our economy through lower trade,” he said.
The BSP chief, however, pointed out that trade as a percentage of Philippine gross domestic product is still relatively lower than those of its peers in the region.
“So the risk here is probably only of a relatively small magnitude. As for deflation materializing in the Philippines, the risk is not significant,” he said.
“For one, our demand conditions are firm. Services and industry remain strong. And on the demand side, consumption is seen remaining robust,” he added.
Tetangco said wage rigidities and the upside risks from pending petitions for utility rate adjustments and potential power shortages are also factors to consider that the possibility of deflation in the Philippines is remote.
Given this scenario, he said the BSP’s initial projections using lower oil prices show that inflation would still be within the 2-percent to 4-percent target range for 2015.
He pointed out that indications of easing inflationary pressures owing in part to the decline in international oil prices as well as signs of robust domestic economic growth allow the BSP some room to maintain its current monetary policy stance.
“Even so, we do not pre-commit to a set course of action. As I have always said, the stance of monetary policy will remain data-dependent,” he noted.
Lastly, Tetangco said the monetary authority continue to watch developments in the oil market carefully and how these affect inflation and growth dynamics, to see if there is any need to make adjustments in the stance of policy.