Inflation is normalizing – Medalla

Published January 24, 2023, 4:29 AM

by Lee C. Chipongian

Bangko Sentral ng Pilipinas (BSP) Governor Felipe M. Medalla assured foreign investors that the country’s inflation numbers are normalizing and on target to be below two percent by 2024.

“We’re already beginning to see signs that month-on-month inflation is normalizing,” said Medalla during the first leg of the Europe-centric Philippine Economic Briefing in Frankfurt, Germany, on Monday, Jan. 23.

Medalla with other members of the economic team from the finance, budget and socioeconomic departments, was more optimistic of achieving the two percent to four percent inflation target perhaps earlier than expected.

“We expect that by end of the third quarter or by the fourth quarter, we will be already below four percent. Indeed, our models predict that because of high base effects, we will actually be below two percent early 2024,” he told German investors.

By next year, he said the country’s inflation “will be more or less near the mid-point of the target.”

The high inflation is a key challenge for the Philippines in meeting its six percent to seven percent growth projection for this year. The BSP estimates inflation will slow down to 4.5 percent in 2023 versus its actual 5.8 percent average in 2022. However 4.5 percent is still above the government target band of two percent to four percent.

The BSP chief said inflation is largely a supply-shock inflation. It was a global problem but lately, on the local front it has become an issue of agricultural product shortages. “Obviously, the solution is to import more and get rid of all the non-tariff barriers … I’m satisfied that the government is now doing everything it can to speed up importation,” he said.

Medalla said that based on the country’s inflation history, the “worse” or “longest number of consecutive months that (Philippines has) above four percent inflation is 15 months.”

It would take 15 to 16 months for the base effects to eventually lower inflation because the shocks “do not beget an additional wage price effects on inflation.” There is no second-order effects and therefore, inflation is gone by 15 months.

“In this particular case, if you use that formula, inflation will be back to normal – it started in April (2022) so 15 months — by July (2023). But, I think this inflation is worse than before so we probably have about 17 or maybe 16 months. Worse case scenario, about 18 months of above four percent inflation (before getting) back to normal,” said Medalla.

Inflation started rising above the target in April last year as the Ukraine war which started on Feb. 28, 2022, impacted on both global and local prices. As inflation remained elevated, the BSP tightened its monetary policy to reanchor inflation expectations.

“The advantage of a credible inflation targetting central bank, is that eventually the effects of supply shocks disappear and we’re back to normal,” according to the BSP chief. “We’re well into a target-consistent path of inflation. We’re not there yet, but we will be there,” Medalla reiterated.

To ensure inflation falls below four percent this year, the BSP is expected to raise the policy rate by 25 basis points (bps) to 50 bps during their Feb. 16 Monetary Board policy meeting, the first for 2023.

Medalla said the pressure to match US rate increases are lower compared to 2022. To maintain a peso-US dollar exchange rate differential, the BSP raised its key rate by a cumulative 350 bps last year.

The BSP said the risks to the inflation outlook continue to be on the upside for 2023 but remains broadly balanced for 2024. The key upside risks are the potential impact on international food prices of higher fertilizer prices, trade restrictions and adverse global weather conditions. The higher food prices such as sugar and meat due to bad weather and supply disruptions are also upside risks, including pending petitions for transport fare hikes.

The BSP had thought previously that inflation will peak in October 2022 but typhoons and consistent weather disturbances continued to affect supply chains. The central bank strongly believes inflation has peaked in December at 8.1 percent.

As of Dec. 15, 2022, the BSP policy rate is at 5.5 percent. Medalla has already signalled to the market that it will implement at least two more rate hikes this quarter.