Inflation may peak at 6.5% in June – BSP

Published June 30, 2022, 2:29 PM

by Lee C. Chipongian

The Bangko Sentral ng Pilipinas (BSP) said inflation for the month of June could hit a high of 6.5 percent on the back of a weak peso versus the US dollar and persistent high food prices.

Outgoing BSP Governor Benjamin E. Diokno said on Thursday, June 30, that the low end of the June inflation forecast is 5.7 percent, still higher than the May actual inflation rate of 5.4 percent. The government inflation target for 2022 until 2024 is two percent to four percent. For this year, BSP’s average inflation rate forecast is five percent flat.

Diokno, citing the BSP’s Department of Economic Research, said the “continued increase in domestic oil prices, upward adjustment in electricity rates, higher prices of key food items, and peso depreciation are the primary sources of inflationary pressures during the month.”

“(But) these could be offset in part by lower price of LPG and fish,” he also said.

Diokno served his last day as BSP chief yesterday, June 30. He is incoming Secretary of the Department of Finance under the newly-installed Marcos administration.

“Looking ahead, the BSP will continue to monitor closely emerging price developments to enable timely intervention to arrest emergence of further second-round effects, consistent with BSP’s mandate of price and financial stability,” he added.

The BSP has noted that the risks to inflation outlook are now tilted to the upside not only for this year but also extended to 2023 before “balancing out in 2024.”

Possible sources of upside pressures are continued higher fuel costs, the shortage of domestic fish supply and additional transport fare hikes due to the rising oil prices.

The BSP recently raised its policy rate anew by another 25 basis points (bps) last June 23, bringing the rate to 2.5 percent. The first time it increased the key rate was last May 19, after keeping it frozen at two percent since November 2020.

The BSP also adjusted higher its average inflation forecast for 2023 to 4.2 percent, still above the target. It only expects inflation to return to within the target in 2024 at 3.3 percent. The previous estimates last May 19 was 4.6 percent in 2022 and 3.9 percent in 2023.

BSP Deputy Governor Francisco G. Dakila Jr. said inflation will average at 5.6 percent in the second half of 2022 because of continued increase in the global commodity prices and a more entrenched second-round effects to inflation.

As for the depreciating peso vis-à-vis the US dollar, Dakila echoed what incoming BSP governor, Monetary Board member Felipe M. Medalla, said earlier that the peso is not inherently weak but is just reacting to a strong US dollar with the normalization of US interest rates. The peso’s depreciation mirrors other weak currencies in the region.

The peso broke past P55, a 17-year low, on Wednesday, June 29. The last time the exchange rate was at P55 was on Oct. 27, 2005 when it closed at P55.08:$1. The weakest peso was at P56.45 in 2004, during the Arroyo administration.

The country’s exchange rate policy supports a freely floating exchange rate where BSP allows the market to dictate the spot market. But, it will intervene in cases of extreme peso rate volatility.

 
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