Philippine inflation is expected to peak or hit its highest level this year in November or December as the central bank exhausts all its policy toolkits to ensure price pressures will start to ease by mid-2023.
“Inflation will peak either November or December. Our forecast is that by the second half of next year, it will be below four (percent) already,” said Bangko Sentral ng Pilipinas (BSP) Governor Felipe M. Medalla in a Bloomberg TV interview on Friday, Nov. 4, following the government announcement of a 7.7 percent inflation rate for the month of October, up from 6.9 percent in September.
Medalla also said that the “good thing about it (October inflation) is it’s due to one-off shocks” and that the tendency of rising food prices is that even if prices do not go down, the “rate of increase eventually normalizes.”
“We expect inflation this year – because the beginning of the year was slow -- will average 5.6-5.7 percent. Next year, it should average close to four percent because the second half will be between three and four (percent),” he added.
Medalla reiterated that the BSP already raised the policy rate by a cumulative 225 basis points (bps) since May this year to “increase the likelihood” that 2023 inflation will settle within the government target range of two percent to four percent – “and unless there are new shocks, that will be true as well for the rest of 2024.”
The BSP chief said on Nov. 3 that the BSP will match the recent 75 bps rate hike of the US Federal Reserve, and come Nov. 17, the Monetary Board will mirror the Fed’s action. As of Sept. 22, the BSP’s policy rate is 4.25 percent.
“Right now they are four (US rate), with the policy rate increase, ours will be five (percent). That’s a comfortable margin between the two policy rates. The formula is quite simple -- a comfortable margin between the two policy rates and strategic use of our reserves will make the exchange rate more stable,” said Medalla. With rising US rates, the US dollar has been beating most major currencies around the globe, including the peso which fell to a record low of P59 in September and October.
However, while Medalla already signalled their plan to be at least 100 bps higher than US Fed rates, they do not intend to match future increases if local inflation will show indications that it is starting to lose its steam.
“(Matching the Fed) also depends on the inflation picture. For instance, if it’s clear already that the inflation rate is decelerating we may not have to match. But if the inflation rate remains high, then we have to match. It’s too soon to say,” said Medalla.
In a separate statement, the BSP said on Friday that the 7.7 percent October inflation is still within the BSP’s forecast range of 7.1 percent to 7.9 percent.
The BSP said inflation path is still “consistent with the BSP’s assessment of inflation remaining above target over the near term as price pressures broaden and signs of further adverse second-round effects emerge.”
The BSP expects inflation to remain elevated for the rest of 2022 but will slow down in 2023 mainly because of these factors: easing global oil and non-oil prices; negative base effects from transport fare adjustments in 2022; and as the impact of BSP’s cumulative policy rate adjustments take hold on the economy.
“The risks to the inflation outlook appear to be tilted to the upside for 2022 and 2023 but are seen to be broadly balanced for 2024. The potential impact of higher global non-oil prices, additional transport fare hikes, increased food prices owing to weather disturbances, and sharp rise in sugar prices are the major upside risks to the inflation outlook. Meanwhile, the impact of a weaker-than-expected global economic recovery is the primary downside risk to the outlook,” said the BSP.
The BSP’s policy-making arm, the Monetary Board, still has two policy meetings for 2022, on Nov. 17 and on Dec. 15. The market expects the central bank to execute 150 bps rate increase before the year ends, or 75 bps each on the last two policy meetings, which will bring the key rate from 4.25 percent to 5.75 percent.
“The BSP remains prepared to take all further monetary policy actions necessary to bring inflation back to the target over the medium term,” it said on Friday. It also reiterated that it “continues to strongly urge the timely implementation of non-monetary government interventions to mitigate the impact of persistent supply-side pressures on inflation.”