By Lee C. Chipongian

The implementation of two anti-inflation measures – rice tariffication and temporary suspension of the excise tax on fuel – should be enough to temper upside risks to future inflation and keep it within the two-four percent target.

“The impact [of these two factors] is sufficient to bring us back to the two-four percent inflation target range,” said Bangko Sentral ng Pilipinas (BSP) Deputy Governor Diwa C. Guinigundo. “The likelihood of this happening is very high [keeping inflation rate within the target] because many of the upside risks have already materialized,”

Based on mid-November data that the BSP used for its latest 2019 and 2020 inflation forecasts, the rice tariffication will reduce inflation impact by 0.85 ppt in 2019, while the suspension of excise tax on oil will lower both 2019 and 2020 inflation by an additional 0.10 ppt.

Without the reprieve on oil prices next year with the temporary excise tax suspension, and had the passage of the bill on rice tariffication been delayed further, the BSP would have adjusted its 2019 inflation to just 4.2 percent from the September (during its September 27 Monetary Board meeting) estimates of 4.3 percent, and not 3.5 percent as announced last Thursday.

Upside risks to inflation – or the worse of it – could have all come to pass and more importantly, are being dealt with both by the BSP and the government through mitigating measures.

Guinigundo said the lowering of 2019 inflation estimates to 3.5 percent from 4.3 percent, and 2020’s revised 3.2 percent from an earlier forecast of 3.3 percent, shows the BSP’s assessment that inflation expectation will soon settle to within manageable levels after considering all the upside risks.

As for this year, the balance of risks to inflation is still on the upside and the BSP expects inflation to average at 5.3 percent in 2018, way above the target band of two-four percent. After October’s steady 6.7 percent inflation results which is still a nine-year high, the year-to-date inflation went up to 5.1 percent. Month-on-month seasonally-adjusted inflation eased to 0.3 percent in October from 0.8 percent in September.

During the press briefing that followed Thursday’s Monetary Board policy meeting where it decided to raise benchmark rate by another 25 basis points (bps), governor-in-charge Maria Almasara Cyd N. Tuano-Amador said the rate increase was still considered despite the slower GDP growth in the third quarter of 6.1 percent (versus the previous quarter’s 6.2 percent), because the BSP thinks that the inflation expectations have remained elevated due to price pressures coming from wage increase.

The Monetary Board, minus BSP Governor Nestor A. Espenilla Jr. and member Peter B. Favila who are both on leave and are not expected to vote, also believes that the economy can absorb another rate hike after the past four meetings’ 150 bps increase. Thursday’s fifth rate hike has now increased the BSP policy rate by 175 bps.

Upside risks to inflation includes the impact of the implementation of Republic Act No. 10963 or the Tax Reform for Acceleration and Inclusion (TRAIN) law on the prices of domestic goods, a weaker peso and volatile exchange rate, wage adjustments, higher utility prices, and bad weather because of supply shortage. From the external side, upside risks are the volatile global oil prices, trade tensions, and tighter global financial conditions.

Other upside risk worries come from transport fare increases, strong domestic demand during the holiday season and due to the upcoming election, and the delay in the implementation of non-monetary measures to curb high inflation.

Last week, Senate Bill No. 1998 (“Replacing Quantitative Import Restrictions on Rice with Tariffs”) amending Republic Act No. 8178 or the Agricultural Tariffication Act of 1996 was approved on third and final reading. Congress and the Senate will reconcile its versions before submitting to Malacanang for President Duterte’s signing a law that would lift quantitative restrictions on rice imports.

On the day of the Monetary Board’s meeting, Malacanang also announced the suspension of the scheduled P2 increase in the excise tax on fuel next year – as stipulated in the TRAIN law which was implemented in January – in a bid to further ease price pressures.