2008-07-24 13:06:45 - The Bangko Sentral ng Pilipinas (BSP) on Wednesday hinted at more rate hikes in the coming days to tame the continued fast rise of inflation, which, in turn, would slow the economy's growth.

By Joann Santiago-Villanueva

MANILA

www.balitapinoy.net

BSP Governor Amando Tetangco Jr. told members of the Foreign Correspondents Association of the Philippines (FOCAP) that they are after the movement of inflation 'because price stability is critical to sustained, durable economic growth.'

He explained that 'sustained high inflation can unseat inflation expectations and potentially create a repeating cycle of lingering inflation and wage pressures that

could prove costly to the economy. '

'We believe that the series of policy adjustments will help in steering inflation towards its desired path for the medium term,' he pointed out.

He explained that the economic situation in the country is now more challenging as a result of weak US economy primarily due to the credit crunch and the high and unstable oil and food prices resulting to a more difficult operating environment.

'The main problem is uncertainty,' he said, noting the seemingly non-stoppable reports of large losses in the US' financial system and the lack of information that 'breeds fear of ratings downgrades, of steep sell-offs, and of other unknown consequences.'

The BSP chief said the greatest challenge so far is the surge of oil prices, although this has gone down to above US$ 120 per barrel from the record high level of above US$ 140 in the past weeks.

Prices of food also remain high, he said, adding to the acceleration of domestic inflation.

Last June, inflation hit double digit at 11.4 percent from year-ago's 2.3 percent bringing the year-to-date average at 7.6 percent.

The central bank forecasts inflation to peak at the end of the third quarter while full-year average is about nine to 11 percent from 2.8 percent in 2007.

Inflation is seen to remain at double digit until the first quarter of 2009 before it starts normalizing on expectation that prices of oil and food will go down by next year.

Tetangco said the policy-making Monetary Board (MB) has noted the impact of second-round effects since June, thus, the 25 basis points (bps) increase in the central bank rates.

He said the 50 bps hike in the BSP rate this July was made after monetary officials 'started to see stronger signs of second-round effects, with core inflation rising and inflation expectations trending upwards.'

The Philippine economy continues to be resilient, he said, after 'the country was able to build up cushions that serve as sources of resilience for the economy against potential shocks.'

He said the economy posted a 5.2 percent growth in the first half of the year because of the strong performance of services on the production side, and by consumption spending, on the expenditure side, while strong growth of net factor income from abroad (NFIA) enabled the gross national product (GNP) to grow by 7.3 percent.

'There is resilience here because growth is broad-based and, notwithstanding the difficult times, the magnitude of growth is quite respectable,' he stressed.

Also, the banking sector continues to post gains because of the central bank's reform measures, he said.

'There is resilience here because our major financial intermediaries have remained strong enough to continue channeling savings into investment, and therefore supporting production and more sustainable employment,' he said.

The central bank chief, however, said they are on the look-out for possible spill-over from the US slowdown, the global economy and investors' continued risk aversion because 'these could pose downside risks to output growth that could impact negatively on the banking system's growth.'

The higher demand for skilled Filipino workers are also contributing largely to the domestic economy that helps the country register a US$ 1.9 billion balance of payment (BOP) surplus in the first half of the year, which, in turn, brought the country's dollar reserves to US$ 36.7 billion at the end of the first six months of the year.

At end-May this year, remittances grew by 14.7 percent year-on-year after it reached US$ 6.8 billion.

The country's trade deficit is seen to grow because of higher oil prices 'but remittances and income receipts from services coming from a vibrant business process outsourcing (BPO) industry should provide the needed support.'

He said they aim to ensure that growth of the economy and its resiliency will be continued stressing that 'the BSP is prepared to take all necessary actions to address the threat of high inflation and promote price stability.'

'The resiliency of our economy allows us to have greater flexibility in responding to the challenges that come our way,' he added.
(Balita Pinoy - Philippine news & Analysis)