The yet-to-recover economy has suppressed threats of second-round effects for now but the rising global oil prices as the rest of the world recovers from the pandemic, and its impact on local inflation warrants extra vigilance, according to Bangko Sentral ng Pilipinas (BSP) Governor Benjamin E. Diokno.

“When we talk of second-round effects – for example for higher oil prices --- the second round effects will be there if there is a demand for higher transport costs which I don’t think is likely to happen given the slack of the economy,” said Diokno during his regular virtual “GBED Talks” on Thursday.

He noted that so far, the underlying price pressures continue to be “subdued”. “However, the BSP remains on the lookout for possible second-round effects that may require a monetary response.”

Case in point is transport services or fares which Diokno said were elevated since 2020, driven mostly by fare hikes from tricycles and pedicabs as these are the only modes of transport during the strictest period of the pandemic lockdowns. Transport services were in double-digit inflation rates since July 2020. “This was mainly due to fare increases for tricycles and pedicabs owing to limited public transportation amid the pandemic,” he said.

BSP Director Dennis D. Lapid of the Department of Economic Research said the BSP is constantly on the look out for any evidence of second-round effects from higher consumer prices. As far as they can tell, he said both BSP and the market or the private sector have well-anchored inflation expectations.

“The risk of second-round effects will tend to be counter-balanced also by the amount of slack in the economy given that domestic demand is still in the very early stages of recovery. That will tend to dampen the pressure from the second round-effects. Nevertheless, I think the BSP is still exerting efforts to look closely at the evidence,” said Lapid.

The BSP’s latest inflation forecasts for 2021 is 3.9 percent and three percent for 2022 – both averages are within the target band of two-four percent. The global oil price outlook is already factored in these forecasts. Both the International Monetary Fund and World Bank predict that global crude oil prices will climbe above $50 per barrel in 2021 and 2022.

“These developments and changing dynamics were already considered in the latest baseline inflation projections of the BSP. Notwithstanding the slight increase in the oil price assumptions, the baseline inflation path is projected to be target-consistent over the policy horizon,” said Diokno.

“However, the BSP will continue to monitor and update the oil price outlook as it remains highly uncertain given evolving developments related to the pandemic and the uneven global recovery,” he added.

The increase in global oil prices in recent months has been driven by changes in supply-demand dynamics as global demand recovers and OPEC Plus production cuts have pushed oil prices higher in 2021 compared to the previous year’s levels.   

Diokno said central banks typically accommodate commodity price increases as they tend to be transitory in nature. However, the impact of global demand-supply imbalances on oil prices may become more persistent and could potentially lead to second-round effects in oil-importing economies, he added.