BSP  RULES  OUT  DEFLATION

MANILA,
JUNE 15, 2009
(STAR) By Des Ferriols - The Bangko Sentral ng Pilipinas (BSP) has ruled out the possibility of deflation even with the economy likely to go into recession this year, indicating further monetary easing down the road.

BSP Governor Amando M. Tetangco Jr. told reporters over the weekend that inflation is heading downwards but there are still no indications that prices of basic commodities would actually start declining.

The inflation rate is a measure of increases in the prices of basic commodities. The higher the rate, the faster prices are increasing. When price increases slow down, the rate drops and when the inflation rate turns negative, it means prices have actually started declining.

But Tetangco said it is unlikely that the inflation rate would turn negative, especially with the world prices of oil starting to go up again.

“At the moment, we see inflation still trending downward, and falling to within target for both 2009 and 2010,” Tetangco said. “While we have reduced our forecasts on inflation, we still don’t see a situation of deflation.”

“As such, there is room for policy to continue to be accommodative,” Tetangco added. “Our primary mandate is price stability, so monetary policy will continue to be determined by our assessment of the risks to inflation.”

According to Tetangco, the BSP is monitoring domestic and global developments to ensure its monetary policy stance is appropriate. He said officials were particularly watchful of liquidity supply.

“We’re watchful the liquidity level doesn’t become excessive,” Tetangco said. “We are also monitoring international oil price developments to see if there is any rise in speculative activity on oil and other commodities due to the expected rise in global demand.”

The BSP has so far reduced its policy rates by 175 points and monetary officials said they could and would probably continue to ease monetary policies as long as inflation is coming down.

However, officials have increasingly cautioned that there were concerns over the level of liquidity in the market although the growth in money supply has slowed down to around 13 percent.

“If we can accommodate growth in the process of reducing the policy rate, we shall be accommodative,” said BSP Deputy Governor Diwa Guinigundo. “The other prong of monetary policy is of course the calibration of domestic liquidity to ensure its availability and to help in the proper functioning of the credit market,” he added.

To the extent that the resulting liquidity would not be excessive and would be consistent with non-inflationary growth, Guinigundo said liquidity measures would be considered. “The important issue here is the careful balancing of the amount of liquidity needed by the economy and that amount that when reached at some point might abet inflationary buildup,” Guinigundo said. “It is also an important issue to avoid unnecessary instability in the foreign exchange market that could be triggered by an unreasonably low real policy rates.”


Chief News Editor: Sol Jose Vanzi

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