Inflation expected to remain elevated

MANILA, Philippines — New York-based Global Source Partners Inc. expects inflation to remain elevated and to stay above the two to four percent target of the Bangko Sentral ng Pilipinas (BSP) until next year.

Former finance undersecretary Romeo Bernardo, who is the country analyst at Global Source, said inflation may accelerate to 5.6 percent this year before easing to 4.4 percent next year from 3.9 percent in 2021.

“We expect the rate to close 2022 around the current high level for a full-year average of 5.6 percent. With continuing price pressures and the headline rate likely to return to below four percent only in the third quarter of 2023, we expect the full-year average to reach 4.4 percent, above the BSP’s two to four percent target,” Bernardo said.

Inflation averaged 5.1 percent from January to September and stayed above the central bank’s two to four percent target range. It accelerated to 6.9 percent in September after easing slightly to 6.3 percent in August from 6.4 percent in July.

“The headline rate itself is unsurprising, falling within the BSP’s 6.6 to 7.4 percent forecast for the month. Fish, sugar and flour-based products were the main contributors to food price inflation while electricity prices were a major factor for non-food price inflation,” Bernardo said.

Although the softening of world crude oil prices in recent months has helped to moderate local price increases, Bernardo said various factors would continue to exert pressure on prices.

These include the impact of bad weather on food supply including rice outputs, a sharply weaker exchange rate, creeping rounds of cost-push adjustments in prices of goods and services, increased odds of higher electricity rates should a major distributor resort to sourcing power supply from the spot market, and probably higher global rice prices.

To tame inflation and stabilize the peso, the BSP has so far raised key policy rates by 225 basis points, which brought the benchmark interest rate to 4.25 percent, the highest since the 4.50 percent in June 2019.

The increase has wiped out the cumulative 200-basis-point cut in 2020 that brought the overnight reverse repurchase rate to an all-time low of two percent as part of COVID response measures.

Despite the series of rate hikes and active participation in the foreign exchange market, the peso hit an all-time low of 59 to $1 on Oct. 3 amid expectations of more huge rate hikes by the US Federal Reserve to fight inflation.

“In a veiled statement that outlines the way forward, the BSP has signaled concern about the rapid depreciation of the peso, which touched 59 to $1 in recent trading. Indeed, it is unclear how aggressively the BSP will respond to an evidently hawkish US Fed,” Bernardo said.