The Bangko Sentral ng Pilipinas (BSP) has a higher threshold of $100 per barrel for Dubai crude oil compared to its previous assumptions, allowing it some “good margin” to forecast inflation going forward, according to BSP Deputy Governor Francisco G. Dakila Jr.
This means the BSP’s inflation forecasts for 2023 and 2024 will remain intact for as long as the $100 per barrel latest Dubai crude oil assumption is not breached, said Dakila during the administration’s Philippine Economic Briefing (PEB) on Wednesday, Aug. 9, in Davao.
The higher oil assumptions allow the BSP some leeway in inflation forecasting. Currently, it forecasts average inflation of 5.4 percent for 2023, 2.9 percent for 2024 and 3.2 percent for 2024.
“Oil has been recently rising again in the international markets but nevertheless, other things being constant, we have quite a good margin for oil,” said Dakila.
Based on the BSP’s latest simulation, they have a threshold of $100 per barrel for oil “before oil will cause a breach of our inflation target for next year,” he said. Dubai crude oil is priced at around $87 per barrel at the moment.
The BSP as an inflation-targetting central bank remains confident that inflation will be within the two percent to four percent target band by October or November this year, and below two percent in the first three months of 2024 as the confluence of unusual shocks -- barring further unexpected supply side shocks -- start to dissipate.
In the BSP’s last Monetary Policy Report, it has a lower assumption for global crude oil prices of $77.2 per barrel for 2023 and $72.7 per barrel for 2024. At the time, the lower crude oil price path reflected the likely near-term decline in oil prices as risks of a US recession amid recent issues in the banking sector could dampen oil demand growth, said the BSP.
In the May simulation, to assess the impact of various outcomes in global oil prices on the inflation forecasts for 2023 to 2024, the scenarios used by the BSP ranged from $70 per barrel to $130 per barrel.
In this review, the BSP noted that inflation will breach the two percent to four percent target range in 2024 if Dubai crude oil price averages above $95 per barrel. However, these oil price scenarios considered only the direct effects and do not incorporate any potential second-round effects on transport fares, food prices, and wage increases among others, said the BSP.
For the first seven months of the year, the inflation rate has averaged at 6.8 percent which is way above the government target.
The BSP said the balance of risks to the inflation outlook continues to lean towards the upside owing to the potential impact of additional transport fare increases, higher-than-expected minimum wage adjustments in other regions, persistent supply constraints of key food items, El Niño weather conditions, and possible knock-on effects of higher toll rates on prices of key agricultural items.
Still, with the decelerating inflation path, the BSP is projecting that inflation will further drop to 4.6 percent by the third quarter and three percent by the fourth quarter.
The central bank also thinks inflation will be firmly within the target range by the first quarter of 2024 due to negative base effects and expected decline in oil and non-oil prices.