Inflation forecast adjusted upwards

The central bank’s Monetary Board decided today (February 11)  to keep policy settings unchanged but adjusted the inflation forecast for 2021 higher as it sees consumer price index remaining elevated for most of this year due to supply side shocks.

Bangko Sentral ng Pilipinas (BSP) Governor Benjamin E. Diokno said inflation in the coming months will remain on the high side of the two-four percent target mainly because of “supply constraints on domestic prices of key food commodities such as meat and vegetables as well as the recent uptick in international oil prices.” 

 “On balance, the Monetary Board is of the view that the manageable inflation outlook continues to allow the BSP to maintain an accommodative policy stance and thus complement crucial fiscal policy measures in supporting economic activity and market confidence,” said Diokno.

BSP Deputy Governor Francisco G. Dakila Jr. said they have revised the inflation outlook for 2021 to four percent from its previous estimate in December of 3.2 percent. For next year, the forecast is reduced to 2.7 percent from 2.9 percent earlier.

Dakila said that since the 2022 projection is now lower, this is indicative of the nature of the pressures on inflation, that they are coming all from the supply side and transitory in nature. Next year’s outlook was also revised downward because of base effects.

He said factors that affected the revised inflation projections include the increase in food prices and the higher-than-expected January inflation which he said will carry over to inflation outlook in the next few months.

The change in oil price outlook is also a consideration. The BSP has raised its Dubai crude oil projection to $54.55 per barrel from its previous $47.57 for 2021. For 2022, they now see $51.98 per barrel of Dubai oil versus a previous estimate of $47.44. “These are consistent with the data we’re seeing with oil futures markets and consistent with the assessment of international energy agencies,” said Dakila. Oil prices recovered from signs that the global economy is gaining momentum, that most countries are now able to deal with the virus pandemic and restrictions are also being relaxed. Non-oil prices are also in line with BSP’s expectations of recovery.

 “For the next few months, inflation can remain elevated but we do emphasize that this is transitory in nature and that inflation is expected to go back to within target range towards the latter part of the year,” said Dakila.

Diokno said the balance of risks to the inflation outlook is still broadly balanced around the baseline path in 2021 but is seen to continue leaning toward the downside in 2022.

 “Tighter supply of meat products owing in part to the African Swine Fever outbreak in the country could lend further upside pressures on inflation. However, the ongoing pandemic may continue to pose downside risks to demand and to the inflation outlook. While recent indicators of activity and sentiment have shown some improvement, the emergence of new variants of the virus and possible delays in mass vaccination programs continue to temper prospects for economic recovery and growth,” said the BSP chief.

The interest rate on the BSP’s overnight reverse repurchase facility remains at two percent while the interest rates on the overnight deposit and lending facilities are still 1.5 percent and 2.5 percent, respectively.