The central bank said that even if the 4.8 percent inflation rate in September was the low end of their 4.8-5.6 percent forecast, the consumer price index will still remain elevated and above-target in the near term.
“Inflation could remain elevated in the near term before decelerating to within the target range of two-four percent by the end of the year,” Bangko Sentral ng Pilipinas (BSP) Governor Benjamin E. Diokno commented on Tuesday, Oct. 5, after the government released the September inflation report.
Citing the BSP Department of Economic Research, Diokno reiterated that inflation is “projected to settle close to the midpoint of the target range in 2022 and 2023 with inflation expectations remaining firmly anchored to the target.”
The BSP has recently revised inflation forecast higher for 2021 to an average 4.4 percent from the previous (Aug. 12) estimate of 4.1 percent. For next year, the BSP forecasts 3.3 percent average inflation, up from the previous 3.1 percent. It also raised its 2023 projection to 3.2 percent from 3.1 percent.
The BSP also said that inflation will likely continue to be above the target range of two-four percent this month before starting to decelerate below the target by November this year.
The DER noted the factors that tempered September inflation and why it did not hit above five percent. These factors include the lower annual rate of increase in the transport index. But, it said that the high inflation of past months will continue, driven mostly by supply-side factors due bad weather, volatility in global oil prices, and the continued effects of the African Swine Fever (ASF) on meat prices.
“These supply-side shocks are best addressed by timely non-monetary policy interventions that could ease domestic supply constraints. The return of inflation to the target range is highly contingent on the successful implementation of these supply measures,” said the BSP.
The central bank reiterated that risks to the inflation outlook remain tilted towards the upside for the remaining months of 2021, but still broadly balanced for 2022 and 2023. Upside pressures are mainly world commodity prices, effects of weather disturbances, and prolonged recovery from the ASF outbreak. Downside risks come from the spread of more contagious COVID-19 variants and weaker-than-expected global growth prospects.
Impact on interest rates, peso
ING Bank economist Nicholas Mapa said that with the lower inflation reading in September, the BSP is given a “little more space” to keep its accommodative stance intact for some time.
“Pressure has been building on the BSP to hike prematurely but the surprise inflation print helps the central bank justify its current stance,” said Mapa, adding that “BSP has indicated its preference to give the economy a little more breathing room to aid in the recovery until clear signs of a recovery are evident.”
“We maintain our base case scenario for a well-timed gradual policy normalization by the BSP by the second quarter 2022 with the central bank likely adjusting policy rates 50 bps (basis points) next year,” said Mapa.
Bank of the Philippine Islands (BPI) economists said the real policy rate has been negative for 15 months. The key rate of two percent is lower than the inflation rate, resulting in a negative real policy rate.
The BSP has kept this negative real policy rate “without any severe trade-offs so far given the accommodative stance of the (US) Federal Reserve.”
However, BPI said that with the US central bank’s more hawkish stance – “keeping interest rates at this level (two percent BSP policy rate) will become more and more difficult.”
“Something else will adjust if the policy rate is kept at two percent and most likely that will be the exchange rate. Failure to adjust the policy setting before the Federal Reserve is forced to belatedly adjust its asset purchases and policy rates can translate to a bigger adjustment and more market volatility down the road,” said BPI. The policy normalization in the US and Europe is expected to have a hit on the country’s US dollar reserves.
BPI expects some “substantial peso depreciation” that could “force” the BSP to adjust benchmark rates higher.
“We continue to expect peso depreciation in the medium term as imports will likely recover once the country has vaccinated a huge percentage of the population,” said BPI. Demand for the US dollar may increase and will keep the exchange rate at P50:$1.
First Metro Investment Corp. and its reasearch partner, University of Asia and the Pacific, said that with year-to-date inflation still above the target of two-four percent range, the BSP will “not likely change its policy settings and reserve requirements until year-on-year inflation goes below four percent by November this year.”
“We think the peso will trade in a range in October but may have a slight strengthening bias come November and December as OFWs (Overseas Filipino Workers) pour remittances into the economy for the Christmas holidays,” said the Metrobank unit.