Inflation to peak in Sept.-Oct. – Medalla

Published August 19, 2022, 4:32 PM

by Lee C. Chipongian

Bangko Sentral ng Pilipinas (BSP) Governor Felipe M. Medalla said on Friday, Aug. 19, that inflation rate will likely peak in September or October this year.

Headline inflation year-to-date is at 4.7 percent average as of end-July. The highest rate has been recorded in July of 6.4 percent from 6.1 percent in June.

Medalla in a forum hosted by the Management Association of the Philippines said that “inflation is going to rise more because it has not peaked yet.”

BSP Governor Felipe M. Medalla at MAP Forum

“The peak will come in September, October. Then after that, as global prices started to fall — partly because people are expecting a US recession – we will have lower inflation. We’re moving towards a target-consistent inflation path,” he added.

The BSP’s Monetary Board on Thursday raised the benchmark rate anew by 50 basis points (bps) to 3.75 percent to ensure inflation will indeed fall below five percent in 2023.

The BSP has revised its 2022 inflation forecast higher to 5.4 percent from five percent previously (June 23). But, it has lowered the 2023 and 2024 forecasts to four percent and 3.2 percent versus earlier estimates of 4.2 percent and 3.3 percent, respectively.

Medalla said headline inflation will remain on the high side, or above the target of two percent to four percent, during the first half of 2023.

“It’s really only in the second half next year that we expect that the headline inflation will be closer to three percent than four. Of course, I will not bet my house on it because of so many other things that could happen,” he said after the Monetary Board policy meeting last Thursday.

“Given the actions that we are taking (now), there’s a better than even chance that the second half will outweigh the first half,” said the BSP chief.

So far, the BSP has raised the policy rate by 175 bps since May this year to ensure inflation expectations remain firmly anchored to the BSP’s inflation outlook. Still, the BSP forecasts that the first six months of 2023 will still see high inflation but the second half will yield lower rates.

“My own personal view is the likelihood that inflation next year will be below four or closer to four than three (percent). All of this will depend on what happens to the US (Federal Reserve) … It will be easier if lower prices continue. Even easier if we are able to address domestic supply-side concerns,” said Medalla.

The four BSP rate hikes is expected to lead to a lower, more manageable inflation path over the medium term despite second-round effects such as wage and transport fare increases as a result of elevated oil and non-oil prices

Medalla said the inflation target remains at risk over the policy horizon because of “broadening price pressures” while elevated inflation expectations “highlight the risk of further second-round effects.” The depreciation of the peso vis-à-vis the US dollar is another upside risk to the inflation.

Based on the central bank’s latest survey of private economists, as of Aug. 11, the market expects inflation to average at 5.4 percent this year, 4.2 percent in 2023 and 3.7 percent in 2024.

Most analysts see upside risks coming from elevated global oil and food prices, as well as higher prices for selected goods and services due to rising input costs, second-round effects, and peso depreciation resulting from the aggressive US Federal Reserve and other central banks’ tightening monetary policies this year including the BSP’s.