Inflation outlook still secure, within 2%-4% target – BSP

Published May 5, 2021, 5:30 PM

by Lee C. Chipongian

Bangko Sentral ng Pilipinas (BSP) Governor Benjamin E. Diokno said inflation expectations remain well-anchored to the two-four percent BSP target despite above four-percent inflation since January.

Diokno, quoting the central bank’s Department of Economic Research (DER) on the 4.5 percent April inflation, said the latest inflation rate is still consistent with their outlook that inflation will breach the target in the first half of this year due to supply side pressures “before settling close to the midpoint of the target range in 2022”. By the fourth quarter this year, the BSP also thinks inflation will start to decelerate closer to the target.

Bangko Sentral ng Pilipinas (BSP) Governor Benjamin E. Diokno (MB file)

Generally, for the BSP, inflation expectations are higher for 2021 but anchored to target in 2022 until 2023. The elevated inflation expectations in the near term reflects the upside bias of the risks to the inflation outlook due to supply disruptions and rising global crude oil prices.

According to the DER, “the timely approval of the temporary cut in pork import tariffs is seen to help address supply constraints and ease price pressures going forward.”

The DER’s April inflation forecast range was 4.2 percent to five percent. It continue to say that the balance of risks to the inflation outlook is still balanced around the baseline path in 2021 and on the downside in 2022. “The ongoing pandemic continues to pose downside risks to the inflation outlook and growth prospects. However, improvements in external demand as well as continued rollout of the government’s COVID-19 vaccination program and other stimulus measures will bolster economic recovery,” it added.

The BSP’s Monetary Board will meet next week, May 13, for its third policy meeting for this year.

 “The Monetary Board will consider the latest price developments along with information from the first quarter national income accounts in its review of the monetary policy stance on May 13,” said DER.

ING Bank economist Nicholas Mapa reiterated his expectation that BSP will stick to a flat two percent benchmark interest rate for the rest of 2021 to prop up an economy whose recovery was again interrupted by a seven-week stricter lockdown.

 “We believe inflation will begin to decelerate further in May as supply side issues are addressed by supply side remedies,” he noted, adding that the BSP “has largely looked past the 2021 inflation breach, opting to accommodate the four months that inflation has moved past the two-four percent inflation target.”

 “The recent executive order related to pork importation should help bring down pork prices in the near term while one-off adjustments to transport fares carried out in 2020 will soon wash out.  Meanwhile, economic activity remains subdued with the capital region in partial lockdown and the economy in recession,” said Mapa.

The inflation averaged at 4.5 percent in the first quarter, up from the fourth quarter 2020 of 3.1 percent, and from same time last year of 2.7 percent. Inflation rate in January was 4.2 percent (up from December 2020’s 3.5 percent), 4.7 percent in February and 4.5 percent in March. In the meantime, the Monetary Board has left its key policy rate unchanged at two percent for the overnight reverse repurchase or RRP facility during its policy meetings last February 11 and March 25, based on the assessment that while inflation is above four percent, it will return to the target range by late 2021. For this year, the BSP has an average 4.2 percent forecast, still above the two-four percent target.