By Melissa Luz T. Lopez,
Senior Reporter

THE GOVERNMENT has kept its 2-4% inflation target until 2020, with the central bank seeing that price increases will remain “manageable” despite the expected impact of tax reform.

In a statement, the Bangko Sentral ng Pilipinas (BSP) said the inter-agency Development Budget Coordination Committee (DBCC) has kept the target band for annual inflation for the next two years.

“The current manageable inflation environment could be sustained over the medium term. Inflation projections and expectations continue to indicate that inflation could settle within the current inflation target, although there are upside risks to the inflation outlook,” the BSP said.

The DBCC conducted its second review for the year on Dec. 22, where economic managers decided to keep the annual economic growth target at 7-8% from 2018 to 2022.

Inflation has logged 3.2% from January to November this year, well within the target range and rising from the 1.8% average in 2016.

Price stability is one of the central bank’s key mandates, with inflation dynamics standing as its main consideration in setting monetary policy.

The BSP has kept its policy stance since a hike in September 2014. Borrowing rates currently range between 2.5-3.5%, following procedural adjustments which took effect in June 2016 following the shift to an interest rate corridor.

“Expectations of healthy economic growth alongside the tax reform program would create demand-side impetus to inflation. Nonetheless, the favorable effect of sustained investment spending by the national government on the economy’s productive capacity would help temper inflation pressures,” the central bank said.

President Rodrigo R. Duterte on Dec. 19 signed the first Tax Reform for Acceleration and Inclusion (TRAIN) package as Republic Act 10963.

Split into several tranches, the entire tax reform program is designed to shift the burden to those who can afford to pay more, while raising additional revenues that will help finance the government’s ambitious P8.44-trillion infrastructure development effort until 2022. 

The measure reduces personal income taxes for those earning below P2 million, alongside a simpler system for computing donor and estate taxes.

Foregone revenues will be offset by the removal of some exemptions to value-added tax; increased tax rates for fuel, automobiles, tobacco, coal, minerals, documentary stamps, foreign currency deposit units, capital gains for stocks not in the stock exchange, and stock transactions; and new taxes for sugar-sweetened drinks and cosmetic enhancements.

The TRAIN law is expected to raise P90 billion in additional revenues.

Meanwhile, the inflationary impact of potential increases in international commodity prices are also seen “moderate,” given lower pass-through costs on basic goods.

The BSP sees inflation averaging at 3.4% in 2018, slightly higher than the 3.2% expected this year. By 2019, inflation is expected to average at 3.2%.

The central bank has acknowledged that the pace of price increases is likely to go faster next year, coupled with rising global crude costs. Still, BSP Deputy Governor Diwa C. Guinigundo said that higher oil prices — which have a huge bearing on the consumer basket — would “not be enough to upset inflation” beyond 4%.

Higher duties to be imposed under the tax reform package would likewise have a “transitory” impact on consumer prices, Mr. Guinigundo added.

RELATED ARTICLESMORE FROM AUTHOR