Wednesday, 3 February 2010

Strong peso to help temper inflation in ’10

Rise in foreign capital inflow to prop up currency
By Michelle Remo
Philippine Daily Inquirer
http://business.inquirer.net/money/topstories/view/20100202-250982/Strong-peso-to-help-temper-inflation-in-10

THE BANGKO SENTRAL NG PILIPINAS expects the peso to remain strong this year and help temper the rise in consumer prices, keeping it within the government’s ceiling.

According to the BSP, the strength of the peso will be sustained this year given the improvements in investment sentiment worldwide. Confidence, especially on emerging economies, will help increase foreign capital flows that, in turn, will keep the peso strong.

“The appreciation of the peso resulting from foreign exchange inflows could temper the increase in domestic prices of imported commodities,” according to the minutes of a recent meeting among members of the BSP’s Monetary Board.

The peso’s appreciation to the 46-to-a-dollar level started late last year as portfolio inflows to emerging markets began to rise due to easing global economic concerns.

Monetary officials said the Philippines and other emerging economies would benefit from renewed investor confidence given the resiliency shown by these countries at the height of the global.

Although the peso remains in the 46 level, it temporarily moved into the 45 territory in January.

Latest “hot money” data from the BSP showed that the Philippines registered $147 million in net foreign portfolio investments in the first two weeks of January, improving from $121 million in the same period last year.

According to the minutes of the Mon etary Board meeting, the BSP further said that inflation outlook of the private sector remained benign and in line with the government’s official target.

The BSP this year has set a goal of keeping inflation within a range of 3.5 and 5.5 percent. Monetary officials said its latest estimates showed that the average increase in consumer prices would not reach 5 percent and likely settle at only 4.7 percent.

An appreciation of the local currency makes imported goods cheaper in peso terms, thereby tempering the overall increase in prices.

The BSP said it would keep a policy of allowing a market-determined exchange rate.

The BSP claims it only intervenes in the market in cases of sharp volatility—be it appreciation of depreciation—of the local currency that may cause severe disruptions to business operations of exporters and importers.

Apart from a relatively strong peso, the modest growth of the economy is also expected to temper inflation. The domestic and global economies are only starting to gradually recover from the downturn, and growth rates will only be modest, the BSP said. Consequently, demand for goods and services will increase minimally.

Average inflation for 2010 may be faster than the 3.2 percent registered last year, the BSP said, but it will remain within tolerable levels.

“The widely held assessment is for commodity prices to increase moderately in the future given the outlook of a gradual global economic recovery,” the BSP said.

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