MANILA, June 24, 2005
 (STAR) By Des Ferriols - The International Monetary Fund (IMF) is expecting the countryís national average inflation rate to hit eight percent this year but Fund officials said it still supported the prevailing monetary stance of the Bangko Sentral ng Pilipinas (BSP).

Commodity prices are expected to surge towards the end of the year after the P2 increase in the basic jeepney fare and the P1.50 adjustment in bus fares.

But the IMF said it was not particularly concerned about missing the inflation rate target per se, saying that the underlying factors are more significant and bore close monitoring.

The IMF said that it welcomed the BSPís monetary stance of using monetary policy tools to manage inflationary expectations and contain the impact of any second-round effects on prices.

According to IMF mission head Masahiko Takeda, the IMF was still satisfied with the BSPís most recent monetary action after the Monetary Board adjusted and raised its policy rates last April.

"The inflation rate has been above target for quite sometime so that is no surprise," Takeda said. "The question is whether the inflationary impact of the transport fare hike would materialize in the second half of the year."

According to Takeda, prevailing inflationary pressures are likely to keep the inflation level above target, hitting an average of eight percent this year before going down to an average of seven percent next year.

"Missing the target per se is not the most significant thing by itself," Takeda said. "It is important to look at the underlying factors and whether these factors will give rise to second-round effects."

Supply-side factors, according to Takeda, would have to be monitored to ensure that they are not affecting core inflation.

"By setting an inflation target, it doesnít mean that authorities would have to guide inflation towards that target no matter what," Takeda pointed out, adding that "there is a balance that would have to be achieved as well."

Shortly before the April adjustment in the BSPís policy rates, the IMF had expressed growing concern over the countryís rising inflation rate, warning that supply-related shocks are beginning to have an effect on the core inflation.

The IMF said it still supported the hands-off policy of the Bangko Sentral ng Pilipinas (BSP) until there were clearer indications of second-round effects of supply-side factors, but Fund officials said monetary action might have to come sooner than later.

By April, the BSP raised its rates by 25-basis points to head off inflationary pressures that monetary officials said were beginning to affect medium-term targets.

The primary cause was a succession of supply shocks, led by a jump in meat and fish prices followed by the surge in world oil prices and the hike in power tariffs.

The IMF had expressed apprehension that after missing the inflation target in 2004, the persistence of above-target inflation for a prolonged period might lead to an upward revision of inflationary expectations.

Before the April action, the IMF was divided on their reading of the countryís inflation outlook with some directors supporting the BSPís position to hold off monetary moves until there were clearer signs of actual runaway inflation.

"Many other directors, however, took the view that the balance has already tipped, and that an increase in policy rates is required to guide inflationary expectations down," the IMF said in March.

This time around, Takeda said the IMF still supported the BSPís monetary stance as well as its transparency and open declaration that monetary policy would be guided by the inflation objective as well as the need to manage the exchange rate.

Since April, the BSP has so far kept policy rates on hold, preferring to wait for more definitive evidence that inflation is becoming generalized before taking monetary policy action.

Reported by: Sol Jose Vanzi

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