Inflation may grow but within 2015 target – BSP

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Gunigundo sees Fed tightening boosting dollar vs peso

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A US monetary tightening could send the dollar on an upward spiral again, weakening the peso and pushing up consumer prices in the second semester of 2015, the Philippine central bank warned, but expressed confidence headline inflation will stay within the year’s target.

The Philippine government has set a target of between 2 percent and 4 percent average inflation for 2015 and 2016.

“Our baseline forecasts, as we indicated in the last Monetary Board meeting, are 2.2 percent and 2.5 percent, respectively, for 2015 and 2016, and what we see is that some pressures may be building up in the second semester,” said Diwa Gunigundo, deputy governor for the Monetary Stability Sector of the Bangko Sentral ng Pilipinas (BSP).

“The US Fed is playing its cards conservatively and carefully well. There are lots of balls in the air. The policy direction is quite known: sooner or later, monetary policy will have to be tightened,” Gunigundo told reporters in an e-mail on Friday.

Recognizing the recent run of disappointing economic data in the US, the Federal Open Market Committee after its meeting on Wednesday (Thursday in Manila) stopped offering its “forward guidance” on when it would begin raising the Fed funds rate, quashing speculation about a mid-2015 timing.

But projecting that economic activity will still expand, though at a moderate pace, the FOMC hinted that an interest rate increase later in the year is still possible.

“The issue [is reduced]to both the timing and the amount of adjustment. Patience is too weak a word by this time although the US monetary authorities need a lot of it as disappoint ing macro results haunt the US Fed because of the prolonged uncertainty that it has spawned in the market and all the volatility it has triggered,” the BSP deputy governor added.

Lastly, Gunigundo pointed out that the central bank’s job is to watch out for such risks as that could upset its forecasts and current monetary policy stance.

The BSP considers its current monetary policy stance as still appropriate at 4 percent for overnight borrowing or reverse repurchase (RRP) facility, and 6 percent for overnight lending, or repurchase facility.

The special deposit account rate has been frozen at 2.50 percent, while the reserve requirement ratio for banks still stands at 20 percent.

The peso closed at P44.52 to $1 in Thursday trade. Financial markets were closed on Friday for the Labor Day holiday.

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