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Monetary Board sees tax reform inflation impact only temporary

NEW TAXES expected to be in place by next year will likely have a one-off impact on inflation, the Bangko Sentral ng Pilipinas (BSP) said, adding that such adjustments would not cause a sudden surge in commodity prices.

In explaining its June 22 monetary policy decision, the Monetary Board said that it chose to keep interest rates steady amid expectations that inflation will remain manageable over the next two years despite the higher duties to be imposed on consumer goods.

“While there may be potential transitory impacts of the proposed tax reform program, the social safety nets are expected to mitigate the resulting inflationary pressures,” read the highlights of last month’s meeting published yesterday.

“The long-run effects on productivity will improve overall supply and further dampen inflation.”

The BSP’s policy-setting body kept the benchmark borrowing rate at 3% last month, which came a week after the Federal Reserve announced a second rate increase in the United States this year.

The monetary authority trimmed its inflation forecast for 2017 to 3.1% from 3.4% previously, before slowing to 3% in 2018 and 2019. Such expectations are tempered by “lingering uncertainty” over global economic activity, which would dampen the pace of price increases.

Inflation averaged 3.1% during the first semester, with a June reading of 2.8%, which was a five-month low. However, the BSP said there remains more upside risk to inflation, given the higher excise taxes on fuel, cars, and sugary drinks under the proposed tax reform package now pending in the Senate.

The Finance department wants to raise fresh revenue from these duties, which is expected to counter the reduction in personal income taxes which are expected to be implemented in January 2018.

House Bill No. 5636 approved by the chamber in May would raise an additional P133.8 billion in the first year of implementation, which also includes the reduced exemptions from value-added tax.

The Executive is looking to introduce unconditional cash transfers to some 10 million households said to belong in the “bottom 50%” of the population, as well as subsidies for jeepney drivers and electricity users from island-provinces given the additional tariffs on oil products.

On the other hand, the BSP expects “steady” momentum for economic growth during the second quarter, coming from a 6.4% expansion logged in the three months to March.

“Domestic growth fundamentals are expected to remain intact... GDP expansion could continue due to solid growth in services and industry as well as improved external trade conditions,” the statement read, noting that consumer optimism reached a fresh all-time high last quarter.

Consumer demand is expected to remain firm, supported by a steady stream of remittances and low inflation. Meanwhile, the rollout of infrastructure projects will likewise spur capital formation among businesses, the BSP said.

On the other hand, slower government spending and factory output could affect growth prospects, central bank said.

Latest Treasury data released showed that the government incurred a P63.6-billion budget deficit as of end-May, narrower than the P75.1-billion gap incurred a year earlier.

Some analysts have flagged the slower pickup in state spending as a possible growth dampener, especially without the boost received last year from election-related consumption.

Source: http://www.bworldonline.com/content.php?section=Economy&title=monetary-board-sees-tax-reform-inflation-impact-only-temporary&id=148601