No emerging threats of second-round effects to inflation – Diokno

Bangko Sentral ng Pilipinas (BSP) Governor Benjamin E. Diokno said no evidence of second-round pressures are seen on the country’s inflation despite rising food and oil prices.

BSP Governor Benjamin E. Diokno

Diokno reiterated that this was partly because the economy has yet to fully recover and price pressures still come from supply-side shocks.

Diokno also continue to expect that inflation rate, which dropped to 4.6 percent in October from 4.8 percent in September, will continue to decelerate until it falls below the two-four percent target in 2022.

“There are no clear signs of emerging second-round effects in transport fares or wages. Part of the reason is that inflation pressures over the past year have mostly been coming from a limited set of CPI (consumer price index) components and driven mainly by supply-side factors,” said Diokno in an online press briefing.

“Another possible reason is that the economy is still in the early stages of recovery and has unused capacity that is also mitigating second-round effects,” he added.

BSP Managing Director Zeno Ronald R. Abenoja, also head of the Department of Economic Research, said that while international oil prices remain elevated, they do expect a decline over the near to medium term, based on futures prices.

“Supply of oil may also adjust as demand increases from advanced and emerging economies that are opening up,” said Abenoja.

He added that BSP “still see inflation going down by late this year until next year” and that the Monetary Board “will be assessing the situation in about two weeks and will announce the results of the latest assessment.”

The Monetary Board will have its next monetary policy meeting on Nov. 18, its second to the last policy meeting for 2021.

During Thursday’s press briefing, Diokno said the government’s non-monetary measures to cushion domestic supply have been effective in easing inflationary pressures.

He explained that inflation driven by demand factors tend to be more persistent and likely to have larger second-round effects, calling for firmer policy response. “On the other hand, supply-side shocks tend to be best addressed by timely non-monetary policy interventions to ease domestic supply constraints as these factors tend to be transitory,” he said.

Diokno noted that prices of fruits, fish, and pork have declined in recent months. “With continued implementation of non-monetary supply-side measures, the BSP expects ongoing price pressures to dissipate further in the coming months,” he said.

The recent uptick in inflation has been traced mainly to higher prices of a limited number of CPI basket items owing to supply-side pressures that are considered transitory in nature.

These supply shocks include the impact of adverse weather conditions on the prices of some agricultural food items, the rise in imported crude oil prices, and the ongoing African Swine Fever outbreak in the country.

“Responding to higher inflation requires a clear understanding of the reasons behind inflationary pressures. Demand-driven inflation often requires a firmer monetary policy response. On the other hand, higher inflation caused by rising producer costs or supply-side constraints requires direct non-monetary interventions that help ease those supply constraints,” said Diokno.

Despite the high inflation due to transitory factors, the CPI is projected to ease towards the midpoint of the two-four percent BSP target in 2022 and 2023. The BSP forecasts an average 4.4 percent inflation for 2021 and 3.3 percent in 2022.