BSP SEES INFLATION RATE BELOW 5% UNTIL 2009

MANILA, December 21, 2003 (STAR) By Des Ferriols - The Bangko Sentral ng Pilipinas (BSP) expects the national average inflation rate to remain benign until 2009, going up no higher than five percent in 2004 and 2005 before settling at three to four percent by 2006.

The BSP said while there would be a moderate spike in inflation over the next two years, this would eventually go down to average at a low three percent until 2009.

According to the BSP, the slight uptick in inflation in 2004 and 2005 would be due to the impact of improved output growth and aggregate demand conditions as well as the expected cost-push impact of factors such as the volatility in oil prices.

At the same time, the BSP said the inflation outlook also considered the risks that stemmed from the financial market concerns over domestic political conditions in the run-up to the May 2004 elections, factors that might influence the direction and movement of the peso-dollar exchange rate as well as other financial variables.

BSP Governor Rafael Buenaventura said these factors are expected to put pressure on the inflation rate, on top of additional upside risks from the planned adjustments in import tariffs and utility charges.

This year, the average national inflation rate is still way below the projected 4.5 to 5.5 percent level, due mostly to the slowdown in economic activities that normally creates an upward push on domestic prices.

The BSP’s inflation target is the core basis for setting its monetary policies. "The target serves as an anchor for the public’s expectations about future inflation, allowing them to plan ahead with greater certainty," Buenaventura explained.

He said the inflation target is consistent with the government’s economic growth target of 4.9 to 5.8 percent for 2004 and 5.3 to 6.3 percent for 2005, as measured by gross domestic product (GDP).

As a matter of policy, the BSP’s market intervention function is triggered only when the peso-dollar exchange rate is threatening to have an adverse inflationary impact.

This means that if the exchange rate is threatening to blow up the inflation target, the BSP eases market pressure by "providing liquidity to the market," its euphemism for buying or selling dollars in the market when the peso is gyrating wildly.

Buenaventura said the inflation target was based on the assumption that the peso would range between P54 and P56 to the dollar, a range described by the market as "wide enough to land a Boeing."

"We opted for a wide range because we are expecting a lot of uncertainty and political noise," Buenaventura said. "At the moment, we are already paying a premium of at least two pesos just for political noise alone."

On the other hand, the BSP said it expected interest rates on the benchmark 91-day Treasury bills to reach 7.5 percent in 2004, especially since the government intended to source the bulk of its borrowing requirements from the domestic market through the sale of government securities.

This projected rate would put the prevailing interest rate above the BSP’s policy rates which has been virtually frozen at 6.75 percent since March this year.

Buenaventura, however, cautioned that the government’s borrowing mix could put pressure on the peso but the Department of Finance (DOF) said the 70-30 mix could be adjusted depending on market conditions.