BSP sees 2.5% average inflation in 2021

Published May 6, 2020, 12:00 AM

by manilabulletin_admin

By Lee C. Chipongian

With inflation rate seen to average at a flat two percent for this year especially after April’s 2.2 percent turnout, the Bangko Sentral ng Pilipinas’ (BSP) has adjusted its 2021 forecast from 2.4 percent to 2.45 percent and finally to 2.5 percent.

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“The latest baseline forecasts indicate that inflation could settle at the low-end of the government’s target range of three percent plus or minus one percentage point, at two percent for 2020 and 2.5 percent for 2021,” BSP Governor Benjamin E. Diokno said on Tuesday.

The day before, despite the manageable inflation environment, Diokno said they will likely pause in the easing of the benchmark overnight rate as they assess the impact of their previous policy actions.

ING economist Nicholas Mapa said in a commentary that the market does not see the BSP making any additional “aggressive” policy action despite April’s lower inflation.

The Monetary Board has already cut the policy rate by 125 basis points (bps) so far this year, and also reduced banks’ reserve requirements by 200 bps, among other liquidity-enhancing measures in response to the pandemic.

“BSP has offloaded a hefty 125 bps worth of rate cuts for 2020 and Diokno did hint at pausing momentarily to gauge the impact of previous rate cuts before acting further,” said Mapa. But, he added, “we expect only a 25 bps policy cut if ever BSP opts to ease further as the policy rate edges closer to BSP’s own inflation forecast (for the year).”

Diokno previously announced the two percent inflation forecast last April 27 from an earlier estimate of 2.2 percent for 2020. He also noted a 2.45 percent inflation forecast for 2021 from a previous 2.4 percent projection.

He said the forecast for 2020 was changed because of the continued drop in global crude prices, the decline of non-oil prices and the impact of the COVID-19 pandemic on global and domestic growth outlook. As for next year’s inflation estimate of 2.5 percent, it was higher because of a projected strong recovery in domestic activity as well as in liquidity growth.

Diokno said the 2.2 percent April inflation was within the BSP’s forecast range of 1.9 percent to 2.7 percent with the midpoint at 2.3 percent. The latest inflation was lower from March’s 2.5 percent.

“The latest inflation number is consistent with the BSP’s prevailing assessment that inflation is expected to be benign over the policy horizon due to the adverse impact of the coronavirus pandemic on the domestic and global economy,” he said.

As for the economy, he reiterated that this “will likely follow a U-shaped recovery path” and that “growth is expected to bounce back to its potential output growth in 2021 supported by the measures under the government’s recovery plan.”

The BSP chief said they will continue supporting the “urgent and carefully coordinated measures” of the government to “ease the spillover effects of the pandemic on people and firms, with a view towards preventing any long lasting economic and social damage.”

“In addition to the monetary policy actions that have been announced, the BSP stands ready to deploy any available measures it its toolkit as we continue to assess the impact of coronavirus pandemic on the domestic economy,” said Diokno.

In the meantime, Mapa said price pressures “appear to be on the downtrend with demand side pressure and the oil factor weighing on overall headline inflation.”

“We expect inflation to be subdued for a month after the end of the lockdown but we also foresee a steady acceleration in price pressures in the second half of the year as supply side pressures outweigh the demand side pull.
Accelerating inflation in the third quarter, the period of least favorable base effect in 2020, is another reason for BSP to manage further policy rate cuts and reduction to reserves and we expect only marginal easing from here with fiscal stimulus kicking in to support the economy,” said Mapa.