Inflation will likely average 5.5 percent this year, higher than what the government projected at five percent while the peso is expected to range at the P55-level for the rest of the year, according to former economic officials and market analysts.
In a forum hosted by the Foundation for Economic Freedom (FEF) on Friday, July 8, former Bangko Sentral ng Pilipinas (BSP) Deputy Governor Diwa C. Guinigundo and former Department of Finance (DOF) Undersecretary Romeo L. Bernardo said that a 5.5 percent average inflation for 2022 means the inflation rate will still climb to a possible peak of seven percent in the next months after increasing to a near four-year high of 6.1 percent in June.
“It could reach probably 5.5 percent for 2022 and 4.5 percent for 2023 (on) the basis of what we’re seeing today, (that the) oil prices are going up and down and still averaging $100 per barrel. At the beginning of the year, the BSP assumed $64 to $70. Very difficult to project but it could be higher than the present BSP’s forecast of five percent this year and 4.2 percent for 2023,” said Guinigundo.
Bernardo, the country analyst of think-tank GlobalSource Partners, said they too forecast 2022 inflation to average at 5.5 percent. “To get to that average for the year, it implies that inflation will go up to seven percent in the later part (of the year) or in the coming months,” he said.
In discussing the weak peso and high inflation during the four-hour forum, speakers and host, which also include former DOF Secretary Roberto de Ocampo, economist and National Scientist Raul V. Fabella, and Vaughn Montes, former chief economist at Citibank Philippines, generally agreed and encouraged BSP Governor Felipe M. Medalla to do what he has already signalled to the market, which is to raise the benchmark rate aggressively to 3.5 percent by end-2022 to control inflation. Medalla also said that the Monetary Board is ready to hike rates as much as 50 basis points (bps) by August to temper inflation, exchange rate and rising prices.
Guinigundo et al said a more aggressive moves by the BSP is warranted at this time but de Ocampo pointed out that the BSP tightening actions should be cushioned by effective policies that will not dampen the nascent growth of the economy since the problem “was not our fault” and the source of that problem is the US economy which is headed to a recession.
Meanwhile, Guinigundo said inflationary pressures are no longer from cost-push factors such oil and food prices and global chain issues, but it is coming from spillover shocks and has gone over to the demand side due to wage and subsidy petitions, as well as transport fare adjustments.
The demand-side pressures have caused the peso vis-à-vis the US dollar to depreciate fast in the last three weeks. It broke past P56 on Thursday but closed stronger on Friday at P55.92. In June, the peso lost ground thrice, first to the P53 level on June 10, to P54 on June 17 and to P55 on June 29.
“Further weaknesses on the peso will have more inflationary pressure on inflation and could disanchor inflation expectations,” said Guinigundo.
“Yet, through all this, we can be ambivalent because the BSP itself has shown that the exchange rate pass-through (ERPT) to inflation has dropped from the time when the BSP implemented the flexible inflation targeting framework in 2002. It has yielded generally favorable results in terms of keeping prices stable. This is one of the reasons for the reduction in the exchange rate pass-through,” he explained during the forum.
Pre-inflation targeting or from 1990 until 2001, the short-run ERPT was 0.269 percentage point which means for every P1 of depreciation, domestic inflation went up by 0.269 percentage point. During the inflation targeting period, and in this case from 2002 until 2017, the ERPT declined to 0.042 percentage point.
“Over the long run, (for example) a P3 depreciation, the exchange rate pass-through could easily add 1.26 percentage points (to inflaton). For a P10 appreciation, it is 4.1 percentage points. So Governor Philip (Medalla) has valid reasons to be concerned and to act if need be,” said Guinigundo.
The former BSP official also said that the central bank has estimated the impulse response of inflation to exchange rate shocks, and from 2002 to 2022 in the first quarter versus 2002 to 2010 and after the global financial crisis in 2011 and compare this to 2022, the resulting response was significantly lower.
“When we see sharp movements in very short periods in the exchange rate, and this is accumulating, the monetary authorities must act decisively because market players might get a different idea that the BSP is more concerned with goals other than its own primary mandate of price stability. Then in this sense, inflation expectations might be disanchored,” said Guinigundo.
Last June 23, when the Monetary Board again raised the policy rate by 25 bps, bringing the key borrowing rate to 2.5 percent, it announced an inflation average forecast of five percent for 2022.
Guinigundo is sure the BSP will again upgrade forecasts or “scale up as we go along to the end of 2022.”
“The policy rate is only 2.5 percent. We see the need for the BSP not only to continue tightening monetary policy for the rest of the year and the next, but to do it more aggressively,” he added. Monetary policy has a lag time of nine to 12 months and it will take some time before the higher policy rate will feed through the economy.
“Now that in all probabilities, we might be breaching the inflation targets for both 2022 and 2023 (Governor Medalla) has announced in no uncertain terms, that the BSP is bent on doing a 50 bps adjustment in the policy rate in the next meeting in August. For a central bank forward guidance, this is quite fortright,” said Guinigundo.
He said the BSP has abandoned its usual patient monetary policy stance and has “declared a war against inflation that has (contributed to the decline) in the foreign exchange value.”