2-4% Inflation goal despite peso plunge

A MONETARY Board member of the Bangko Sentral ng Pilipinas (BSP) forecasts inflation to remain within the two to four percent target by yearend despite the Philippine peso’s depreciation to P51.21 versus the US dollar on Monday, making it the worst performing currency in Southeast Asia.

“I am confident inflation will be within the targets,” said Valentin Araneta during the BSP Stakeholders appreciation lunch at the BSP Cebu Regional Office yesterday.

He noted the strong economic fundamentals that will propel the Philippine growth story.

“The fundamentals of the economy are strong, a strong Gross Domestic Product growth fuelled by investments so we are stronger in terms of growth than other Asean countries,” he said.

Generally for consumers, as the peso depreciates, there is a rise in prices or inflation especially for products that have high import content. Average inflation in the first seven months of 2017 was 3.1 percent, still within the two to four percent inflation target of the BSP.

“We look at the peso as floating vis-a-vis the dollar. Dollar moves. Sometimes it’s strong, sometimes it’s weak. It’s not only the peso. But if you look at it that way, the exchange of the peso for a longer period of time, it’s generally stable,” said Araneta.

He noted that it is not only the exchange rate that significantly affects the prices of goods and services. Generally, inflation is measured using the Consumer Price Index indicator, which measures changes in the prices of a broad basket of consumer products.

Imbalances

An ANZ report titled “Philippines Insight: Intensifying Imbalance” stated that the peso will likely remain the worst-performing currency given its economic imbalances based on three inter-related indicators: “rising credit intensity, persistently high exposure to the real estate sector alongside rising property prices, and deterioration in the external position.”

Meanwhile, Credit Suisse expects the peso to weaken further to 52 to $1 over the next 12 months, as the country’s current account deteriorates. Current account is defined as the sum of a country’s balance of trade (exports minus imports), net income from abroad and net current transfers.

For 2017, the BSP expects the current account to swing to a deficit of $600 million from last year’s $600-million surplus.

Araneta said the rise in imports is natural for a fast-growing economy like the Philippines.

“Some countries are showing import deceleration. We are showing import acceleration. What that means is that the trade balance is going to be deficit, because our exports are not growing as fast as imports. That is normal in a high-growth economy. Particularly in our case, we need infrastructure, so we need to import capital goods,” Araneta said.

BSP Gov. Nestor Espenilla Jr. has been quoted in news reports as saying it is “natural” for the peso to show volatility as it adjusts to market conditions and “short-term uncertainties,” and that the peso is capable of correcting itself. (JOG)
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