Central bank says it is ready to curb inflation

By Doris Dumlao

Philippine Daily Inquirer

First Posted 04:09:00 05/09/2008

MANILA, Philippines?As the inflation rate hit a three-year high in April due to skyrocketing food and fuel prices, the central bank, Bangko Sentral ng Pilipinas (BSP), is ready to act to curb the increasing pressure on consumer prices, a BSP official said.

During the BSP?s latest quarterly inflation briefing yesterday, its officials said there were indications that demand pressures, not just supply shocks, were contributing to the sharp increases in consumer prices and the central bank would have a role to play in cooling inflation and managing people?s expectations.

?We?re looking at two things. said BSP Deputy Governor Diwa Guinigundo. First, we?re looking at the second-round effects [of inflation]. If there are wage adjustments and transport fare adjustments, even in terms of utilities charges, once you see an early sign of evidence of second-round effects, I think monetary policy will have a good scope for addressing inflation.?

The second trigger, Guinigundo said, is the role of expectations on inflation in managing actual inflation.

?When you have a situation where prices are going up and people don?t have any idea when it?s going to end, inflation expectations will definitely be affected and again monetary policy will have a significant role to play in ensuring that inflation will remain anchored at least close to what we?re saying in terms of our inflation projection. he said.

When the inflation rate is rising, central banks tend to tighten monetary policy?whether by increasing its overnight borrowing rate, the reserve requirement on banks or any other tool?to control consumer and business spending that may aggravate the increases in consumer prices.

The BSP, which adopts an inflation-targeting approach to monetary policy, aims to keep the inflation rate this year to a maximum of 5 percent and next year at 4.5 percent.

Still attainable

It has conceded, however, that inflation this year might overshoot the target due to unexpected increases in food and fuel prices, but believes the target next year would still be attainable.

?Depending on the movements in oil and non-oil commodity prices, inflation could settle above the 2008 inflation target range but within the 2009 target. he said.

Some analysts who attended the briefing said the BSP might raise its overnight borrowing rate by at least 25 basis points to send the signal it won?t let inflation get out of control.

Unlike the oil crisis of 1973, Guinigundo said the global uptick in commodity prices was not just a problem of tight supply but of booming demand as well, driven by rising incomes in emerging economies like China and India.

?This is also true for basic commodities like rice, corn and wheat. he said.

?This is not to include the role of speculation in the commodities market, so you have all those elements conspiring to produce a difficult situation as far as oil and non-oil commodities are concerned. Guinigundo said.

He said that when there?s a supply shock, economic texts say it?s transitory.

But when you have a problem which is compounded by demand conditions, it?s difficult to say whether it?s good only for 2008. It could go beyond 2009 or 2010. he said.

He said, however, the US-led global slowdown and the tight global credit would hopefully slow down the demand for oil and other commodities.

A tighter monetary policy resulting in higher interest rates in turn increases the cost of borrowing whether for housing, auto and business loans. With editing by INQUIRER.net