Inflation may be losing steam in Q3

Published August 3, 2022, 4:54 PM

by Lee C. Chipongian

The central bank’s signalled rate hike this month may be enough to ensure that high inflation will be back to below four percent by next year as there are signs it may have peaked already and will continue to decelerate in the third quarter.

“Our own midpoint forecast (for 2023) is 4.2 percent. We are revising this with new numbers, I’ll say lower than four percent,” according to Bangko Sentral ng Pilipinas (BSP) Governor Felipe M. Medalla.

BSP Governor Felipe M. Medalla

This is one of the reasons why a 25 basis points (bps) to 50 bps rate hike is pending on Aug. 18, the Monetary Board’s next policy meeting. Another key rate increase will bring the borrowing rate to 3.50 percent to 3.75 percent.

“Now, we have a better than 50-50 chance to do lower than four percent. And, that’s why we’re doing 25 (bps) or 50 (this month) to make sure that (there’s) enough follow-through for that to happen,” said Medalla in a recent forum.

He reiterated that the recovering economy, which he personally expects will grow comfortably by seven percent this year, can absorb more rate hikes. “We’re quite confident there’s still sufficient momentum for growth,” he added. His GDP growth estimate is within the government’s target of 6.5 percent to 7.5 percent for 2022. Last year, the economy grew by 5.6 percent.

Medalla also said that it is more important that the market have confidence in the BSP’s inflation forecasting abilities.

“We believe that in the long run, credible inflation targets result in higher growth. The other way to look at it is the moment inflation is out of control, unavoidably, large output has to be lost, to kill it (high inflation),” he said.

Medalla on Tuesday, Aug. 2 may have also hinted that Aug. 18’s rate hike could be the last for 2022. The pause, if the BSP decides to keep the rate steady after this month, will only last until “early” next year when rate increases may again resume.

“There may or may not be a pause,” Medalla told Manila Bulletin. “Too many unknowns. Can’t say anything with certainty beyond August,” he added. He did say that he thinks both the second and third quarter GDP growth will be in the range of eight percent to nine percent, sustaining the first quarter’s 8.3 percent growth and that inflation may have peaked in July.

Metrobank-affiliate First Metro Investments Corp. and its research partner, University of Asia and Pacific, said in its latest “Market Call” report that inflation has likely started to come down but will remain “close to six percent” in the third quarter.

As of end-June, inflation has averaged at 4.4 percent. The highest monthly inflation was in June at 6.1 percent, a three-year high. The July inflation will be announced on Friday.

The BSP forecasts July inflation to range to a high of 6.4 percent or a low of 5.6 percent. The midpoint of the BSP forecast is six percent for July.

According to FMIC-UA&P, that while inflation could still be around six percent in the third quarter, “we think it should trend downward thereafter as crude oil prices have softened significantly confirming the global economic slowdown.”

It projects the both July and August inflation will be at six percent “or less” because crude oil prices were already slightly lower in July while food prices will also follow a similarly milder pace, said FMIC-UA&P.

As of June 23, the BSP forecasts an average inflation of five percent for 2022 and 4.2 percent for 2023. The 2023 and 2024 will be revised this month, said Medalla. The Monetary Board, BSP’s policy-making body, issues the latest inflation forecasts during policy rate meetings.

The BSP chief said next year’s oil prices may not be as steep as 2022 on account of some resolution to the Ukraine war and other factors, such as interest rates normalization and the price of the US dollar may not costs as much.