High inflation to persist until Q1 2023 – BSP

Published May 22, 2022, 9:10 PM

by Lee C. Chipongian

An above-target inflation outlook is expected to last until the first quarter of 2023 with the consumer price index (CPI) likely to hit a peak of 5.1 percent in May or June of this year, according to the Bangko Sentral ng Pilipinas (BSP).

In the BSP’s latest Monetary Policy Report (MPR), the CPI is expected to accelerate in the next quarters with the latest forecast path indicating that inflation could remain above the two percent to four percent target range until the first quarter next year and “peaking” in the second quarter this year at 5.1 percent.

Meantime, in the BSP’s May 2022 Private Sector Economists’ Inflation Forecasts, the 16 surveyed analysts raised their mean inflation forecast to 4.6 percent from its previous 4.1 percent in the April 2022 survey. For 2023 and 2024, forecasts were also higher at 3.6 percent from 3.4 percent, and 3.4 percent from 3.3 percent, respectively.

The economists’ 2022 inflation forecast is the same as the BSP’s while for 2023, it is lower than the central bank’s 3.9 percent projection.

The MPR noted that inflation will remain elevated at the five-percent level for the rest of the second half of this year.

“Given recent developments, inflation could likely exceed five percent in the next few months. However, barring any further adverse shocks, we also expect inflation to slow down heading closer eventually towards 2023 and revert to within the target band by the middle of that year as the effects of the global commodity price shocks dissipate,” said BSP Governor Benjamin E. Diokno.

The MPR, which was presented by BSP Managing Director Zeno R. Abenoja to the media, reiterated that inflation is still seen decelerating to 4.5 percent in the first quarter 2023 and “going back to the target by Q2 (second quarter) 2023, as both global oil and non-oil prices taper off.”

The BSP announced its latest CPI forecasts last Thursday. It is an average inflation of 4.6 percent for 2022 and 3.9 percent for 2023, higher than the previous forecasts of 4.2 percent and 3.6 percent, respectively. As of April, inflation stood at 4.9 percent, sharply increasing from four percent in March. The four-month average is 3.7 percent. The BSP attributes the higher inflation in April to the faster price increases of food, electricity, and domestic petroleum.

Abenoja said in raising the inflation projections, they took into consideration the latest Dubai crude forecasts of $100.4 per barrel for 2022 and $89.5 per barrel for next year, up from the previous projections of $83.3 per barrel and $75.7 per barrel for 2023.

Meantime, based on the BSP’s survey of economists, they expect inflation to “breach the upper-end of the government’s target range in 2022, with risks to the inflation outlook tilted to the upside largely driven by the adverse impact of the ongoing Russia-Ukraine conflict on global oil and food prices, which are already at elevated levels.”

Analysts, like the BSP, also expect inflation to settle close to the upper band of the two percent to four percent target in 2023 before decelerating in 2024 as the Monetary Board start its round of policy tightening in the second quarter this year.

The surveyed economists expect the BSP to increase the policy rate by as much as 150 basis points (bps) by 2024. On May 19, the Monetary Board has started to raise the benchmark rate by 25 bps to 2.25 percent.

Both the BSP and analysts think upside risks to inflation continue to be the following: supply chain disruptions stemming largely from the geopolitical tensions between Russia and Ukraine, exacerbated further by the reimposition of lockdown measures in China and weather disturbances; and the elevated pressures on the global prices of oil and food commodities brought about by the ongoing Russia-Ukraine conflict, which could result in the continued emergence of second-round effects such as higher energy prices, transport costs, and wage hikes.

They also cited the increase in domestic demand owing to the further re-opening of the economy given loose mobility restrictions, and the weakening of the peso against the US dollar due to threats of downgrade of the Philippine economy and possible withdrawal of investments.

“A few analysts identified the emergence of the new COVID-19 variant and possible resurgence of COVID-19 cases as the main downside risk to the inflation outlook,” said the BSP. However, they also noted that the government subsidies and other non-monetary government interventions such as the lowering of import tariffs on pork and rice could help mitigate inflationary pressures.

The last time the Monetary Board raised the policy rate was on Nov. 15, 2018. In 2018, the Monetary Board increased the policy rates by a cumulative 175 bps. Meantime in 2020, the first year of the global pandemic, the BSP had a series of policy rate cuts, totaling 200 bps, and it also reduced the reserve requirement ratio by 200 bps for big banks and 100 bps for small banks.

The BSP’s key rate or the overnight reverse repurchase facility — frozen at two percent since November 2020 — was adjusted higher to address the elevated risks to the inflation outlook which are now skewed rowards the upside for the both 2022 and 2023.

The Monetary Board also decided to raise the interest rate on the BSP’s overnight deposit and lending facilities by 25 bps to 1.75 percent and 2.75 percent, respectively.