By Melissa Luz T. Lopez
INFLATION momentum has been easing as price spikes due to tax reform have decelerated, the central bank said as it decided to raise rates last month in order to temper future price increases.
Higher interest rates are viewed as a means of softening the impact of possible increases in transport fares, power rates, and minimum wages, according to highlights of the Monetary Board’s May 10 policy meeting.
The policy-setting body of the Bangko Sentral ng Pilipinas (BSP) raised rates by 25 basis points last month, marking the first tightening move in nearly four years which brought benchmark rates to the 2.75-3.75% range.
“[T]he Monetary Board believed that a timely increase in the BSP’s policy interest rate will help arrest potential second-round effects by tempering the buildup in inflation expectations,” according to the four-page highlights of the meeting published yesterday.
The central bank said inflation pressures could become more broad-based over the coming months as they now see the full-year average at 4.6%, well above the 2-4% target.
Despite this, the BSP noted that “inflation momentum has started to slow down” even after April inflation hit a five-year high at 4.5%.
“[T]he impact of the new tax appears to have mostly dissipated based on month-on-month trends while a majority of CPI (consumer price index) items remains within or below the target range,” the BSP also said.
On a month-on-month basis, inflation slowed from 0.7% in March to 0.3% in April, according to government data. This fell further to 0.2% in May. On a year-on-year basis, inflation was a 4.6% in May.
Policy makers introduced a preemptive tightening move in May amid faster year-on-year price increases for basic goods and services.
Petitions for higher minimum wages, transport fare hikes and electricity rates are viewed as key risks that could push prices up, the BSP said.
“The Monetary Board observed that strong domestic demand allows some scope for a measured adjustment in the policy rate without adversely affecting the country’s economic growth momentum,” the central bank added.
Faster-than-expected rate hikes in the United States — which, in turn, will push global yields higher — are also expected to drive faster inflation. Meanwhile, slower global economic growth, geopolitical tensions and the removal of rice import limits are expected to help offset price spikes, the central bank added.
Inflation has averaged 4.1% as of the end of May. BSP Governor Nestor A. Espenilla, Jr. said on Tuesday that latest data showed that inflation is slowing and may be nearing its peak, which could have come earlier than previous expectations of a steady ascent until the end of the year.