THE Bangko Sentral ng Pilipinas (BSP) shrugged off fears of deflation owing to the sharply decreasing oil prices in the international market, saying that the risk in the country is “not significant.”
In a forum in Makati City, BSP Gov. Amando M. Tetangco Jr. expressed confidence that the country’s inflation will remain positive owing to strong demand conditions.
“I have been asked whether we are worried about deflation [due to the substantial decline in oil prices]. Well, deflation effects in the advance economies can spill over to our economy through lower trade. However, trade, as a percentage of GDP [gross domestic product], is still relatively lower than those of our peers in the region. So the risk here is probably only of a relatively small magnitude,” Tetangco said in his speech at the Security Bank’s 2015 economic forum on Friday.
“As for deflation materializing in the Philippines, the risk is not significant,” Tetangco added.
The governor further explained that strong demand conditions, as well as consumption, continue to anchor prices in the country.
He also noted that the government is expected to ramp up its investments to avoid further underspending, and that there are upside risks to inflation, such as pending petition for utility rates, wage rigidities and the potential power shortages.
“There are other factors that lead us to say that deflation is remote—or that inflation would remain positive,” Tetangco said.
Deflation is the overall decline of price levels in an annual basis so that inflation becomes negative. Deflation usually is avoided by central banks as persisting decline of the overall price levels of general consumer goods in the country may cause falling profits, closure of companies and shrinking incomes and employments depending on its cause.
Inflation in the country has been continuously decelerating since September last year, after it hit a peak of 4.9 percent in July and August during the year.
At the start of this year, Tetangco said inflation could fall between 1.8 percent and 2.7 percent, owing largely to the sharp decline in oil prices.
Several local economists also see inflation significantly decelerating in December, parallel with the BSP’s view due to the prices of crude in the international market.
In an e-mailed response to the BusinessMirror, Bank of the Philippine Islands associate economist Nicholas Antonio Mapa said inflation would likely hit 1.9 percent in January.
“I share the view of the governor. Inflation should be subdued for now, given better agriculture-sector performance [main driver for inflation spike in 2014] and benign oil-price movements,” Mapa said.
ING Bank Manila economist Joey Cuyegkeng, meanwhile, said inflation will likely hit 2.4 percent, owing to softer oil prices and easing food inflation. These downward pressures are seen to be offset by the MRT-LRT fare increases.
Hongkong and Shanghai Banking Corp. economist Trinh Nguyen, meanwhile, said inflation will likely hit 2.3 percent and will likely push the BSP to keep its rates on hold next meeting.
The median forecast of the three economists is at 2.2 percent, lower than the 2.7 percent inflation in December 2014.
The Philippine Statistics Authority is expected to release the January 2015 results on Thursday, February 5.
Image credits: Stephanie Tumampos