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World Bank expects price pressures to recede, more BSP policy flexibility

world bank expects price pressures to recede more bsp policy flexibility 816x445 - World Bank expects price pressures to recede, more BSP policy flexibility
World Bank 061818 - World Bank expects price pressures to recede, more BSP policy flexibility
REUTERS

THE World Bank (WB) said Thursday that the Philippine central bank now has room to adjust its policy rates due to the receding risk of inflation, and added that it expects price pressures to decline gradually going forward.

“The BSP’s (Bangko Sentral ng Pilipinas’) mandate is to promote price stability. In a context of stable inflation below BSP target range, no major risks of higher inflation caused by other factors (such as El Niño), and stable Fed policy rate stance (of keeping the rates), BSP has the room to lower policy rates to regain policy flexibility if it sees appropriate,” the World Bank’s Philippines Senior Economist Rong Qian said in an e-mail to reporters.

“World Bank projects inflation to decline gradually to below BSP target,” she said.

The BSP expects headline inflation to average 3.1% this year.

On Wednesday, the World Bank said that it is projecting growth in the Philippines of 6.4% this year due to the delay in passing the national budget. However, growth is expected to pick up in 2020.

“The passage of the budget law was included in our baseline GDP (gross domestic product) forecast. With the passage of the budget, downside risks to the baseline projection is likely to be lower,” she said.

“The Philippines, as with other countries in the region, could potentially benefit from China rebalancing which [is expected] to lower the import requirement of goods, but might increase [demand for] imports of services such as tourism. To effectively benefit from this rebalancing toward more consumption-driven growth, the Philippines would need to become more competitive in export services,” Ms. Qian said.

Last week, BSP Governor Diwa C. Guinigundo said that demand for credit affected the central bank’s decision to tighten monetary policy and produced positive results. However, he noted that inflation is still close to the target’s upper end.

“Any ‘tightness’ we observe is temporary due to higher demand for cash on account of the Holy Week, tax season and the coming May election. There was some restraint on public spending following the delay in the passage of the 2019 national budget despite the large fund-raising exercise of the National Government through the Bureau of the Treasury. Demand for credit was somehow affected by the BSP’s deliberate policy to tighten monetary policy last year to strengthen inflation management which yielded positive results with the decisive reduction in inflation,” Mr. Guinigundo said.

“As these developments unfold, as we are seeing today, liquidity begins to return to the system. Spending and settlement and subsequent re-deposit to the banks, restore the liquidity position of the banks in varying degrees because some of them locked in their funds in loans, others decided to go long on dollars. Government payments to suppliers and contractors and accounts payable will involve withdrawal of its deposits with the BSP and will infuse more money supply to the market.”

“I hope the banks and market analysts are able to enhance their assessment before they ask the BSP to immediately ease monetary policy when the Jan.-March 2019 inflation at 3.8% has barely found itself in the target groove again. Inflation expectations are still close to the upper end of the target. As to domestic liquidity, M3-to-GDP ratio continues to increase which indicates that we have ample liquidity to accommodate the requirements of economic growth,” he added. — Reicelene Joy N. Ignacio

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