Diokno sees upside risks to inflation fading

Published December 7, 2021, 11:46 AM

by Lee C. Chipongian

Bangko Sentral ng Pilipinas (BSP) Governor Benjamin E. Diokno said that despite an 11-month inflation average of 4.5 percent, which breached the full-year forecast of 4.3 percent in November, the inflation is still on track to fall within the two-four percent target range next year.

Diokno believes that inflation will continue to ease as upside risks, such as slow recovery of supply bottlenecks, because these pressures will eventually fade.

BSP Governor Benjamin E. Diokno

The government announced on Tuesday, Dec. 7, a November inflation of 4.2 percent, higher than the BSP forecast range of 3.3 percent to 4.1 percent for the month.

“The November inflation of 4.2 percent was slightly higher than anticipated, settling above the BSP’s forecast range for the month (while) the YTD (year-to-date) average inflation of 4.5 percent point to a breach of the inflation target for 2021,” said Diokno.

“Nonetheless, average inflation is still projected to fall within the government’s target range in 2022 and 2023 as supply side pressures moderate,” he added. Supply-side pressures mainly come from higher oil prices and bad weather.

It is rare when the BSP’s inflation forecast is off the actual rate. The central bank had a 3.7 percent point inflation forecast for the month of November.

“The risks to the inflation outlook are on the upside for 2022 but remain broadly balanced for 2023. Upside risks are mainly linked to the potential impact of weather disturbances on the prices of key food items and the possibility of a prolonged recovery of domestic food supply,” said Diokno. He reiterated that the “strong global demand amid persistent supply-chain bottlenecks could also exert further upward pressures on international commodity prices.”

Diokno also said pandemic lockdowns and possible impact of the Omicron COVID-19 variant could moderate inflation pressures. “(The) potential delays in the lifting of domestic lockdown measures as well as the emergence of more transmissible COVID-19 variants could dampen the prospects for both global and domestic demand and temper inflationary pressures,” he said.

The BSP’s Monetary Board will hold its last policy meeting on Dec. 16.

Diokno said the BSP remains “ready” to “maintain its accommodative monetary policy stance to support the economy’s recovery while also guarding against any emerging risks to its price and stability objectives.”

ING Bank senior economist Nicholas Mapa in a commentary said the November inflation, while down from October’s 4.6 percent, was still higher than market consensus forecast of four percent.

“Elevated global crude oil prices filtered through to increased electricity bills and pricier diesel, keeping the headline inflation number above target for another month,” he said.

Mapa expects BSP will keep its current two percent benchmark rate when the Monetary Board decides next week. He said that “despite the upside surprise for today’s (Dec. 7) inflation report, we expect the central bank to keep rates unchanged at the last policy meeting.”

“We do however expect the BSP to possibly adjust its stance by 2Q 2022 (second quarter) as growth dynamics will likely improve considerably,” added Mapa.

The inflation rate first breached four percent last January and it has stayed above the two-four percent target for the last 11 months.

Despite the high inflation due to transitory factors, inflation is projected to ease towards the midpoint of the two-four percent target in 2022 and 2023. The BSP forecasts an average 4.3 percent inflation for 2021 and 3.3 percent in 2022.

The latest results of the BSP’s survey of private sector economists for November showed a higher mean inflation forecast of 4.4 percent for 2021 and 3.5 percent for 2022.

The International Monetary Fund and the Asian Development Bank forecasts 4.3 percent and 4.1 percent inflation for 2021, and a flat three percent and 3.5 percent projection, respectively, for 2022.

 
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