Inflation pressure eases with power rate hike TRO

Business World Online
Posted on April 23, 2014 10:53:24 PM
By Bettina Faye V. Roc, Senior Reporter

THE INDEFINITE extension of a restraining order against a hefty Manila Electric Co. (Meralco) rate hike will reduce pressure on inflation, the chief of the Bangko Sentral ng Pilipinas (BSP) yesterday said.

Central bank Governor Amando M. Tetangco, Jr. said monetary authorities, when they trimmed inflation outlooks for this year and the next last month, tagged the Meralco rate hike as an “upside risk.”

“Our latest baseline forecasts did not consider the power rate hike that is under the SC TRO (Supreme Court temporary restraining order). But we flag it as an upside risk, given the uncertainty surrounding its resolution,” Mr. Tetangco said in a text message to reporters.

“Thus the forecasts are not affected but this will help lower upside risks.”

The SC on Tuesday issued a new TRO on Meralco’s pending power rate hike, indefinitely halting the implementation of a P4.15 per-kilowatt-hour increase the distribution utility wanted to implement in stages starting last December.

The Monetary Board, during a policy-setting meeting last March 27, among others trimmed its inflation forecasts for this year and next. It said the annual rise in consumer prices would likely average 4.2% this year, down from February’s 4.3%, while the forecast for 2015 was cut to 3.2% from 3.3% previously.

The BSP’s inflation target ranges for this year and the next are 3-5% and 2-4%, respectively.

Mr. Tetango then said the balance of risks to the inflation outlook “continues to be skewed to the upside” given the pending power rate hike and possible increases in food and oil prices.

Earlier this month, he also cited uncertainty as to when supply-side pressures would dissipate and noted possible second-round effects as risks to the inflation outlook.

Even as inflation slowed last month, Mr. Tetangco said the room to keep interest rates steady remained “narrower” as these factors, coupled with growth in money and credit in the financial system, could give monetary authorities a reason to tweak policy.

Inflation settled a four-month low of 3.9% in March, within the BSP’s 3.7-4.6% estimate and down from 4.1% in February.

The Monetary Board, at its March 27 meeting, also kept overnight borrowing and lending rates at record lows of 3.5% and 5.5%, respectively, citing a manageable inflation outlook.

Monetary authorities, however, decided to hike banks’ reserve requirement ratio by 1%, a move meant to help keep both liquidity and credit growth in check.

The adjustment, which took effect last April 4, is expected to siphon off about P60 billion of money in circulation, would allow liquidity growth to “normalize” to about 15-17%, the central bank has said.

Domestic liquidity or M3 -- the broadest measure of money in the system -- rose by 36.4% to P6.928 trillion in February. It was slower than the revised 37.3% expansion recorded in January -- the fastest rate on record.

Analysts have said that the hike in reserve requirements signals the start of a tightening cycle. The Monetary Board next meets to discuss policy on May 8. source