Prices of major commodities decelerated further in July to their slowest level this year but the emergence of new coronavirus variants and additional lockdown measures are seen to pose risks to both demand and inflation.
Inflation at the national level decelerated to 4 percent last month from 4.1 percent in June, the Philippine Statistics Authority yesterday said.
This brings the country’s year-to-date inflation at 4.4 percent, still faster then the government’s full-year target range of between 2 and 4 percent.
PSA said the main source of the downward trend was the lower annual increment registered in the transport index at 7 percent, from 9.6 percent in the previous month.
Contributing also to the downward trend in the overall inflation were the slower annual increases recorded in the indices of alcoholic beverages and tobacco, 10.2 percent; Furnishing, household equipment and routine household maintenance, 2.3 percent; and Restaurant and miscellaneous goods and services, 3.6 percent.
Inflation rates were higher, however, in the indices food and non-alcoholic beverages, 4.9 percent; clothing and footwear, 1.7 percent; housing, water, electricity, gas and other fuels, 2.6 percent; health, 3.1 percent; and communication, 0.3 percent.
Excluding selected food and energy items, core inflation slid further to 2.9 percent in July from 3 percent in June.
Benjamin Diokno, Bangko Sentral ng Pilipinas Governor, said the latest outturn is consistent with the BSP’s assessment that inflation could settle close to the high end of the target range and balance of risks to the inflation outlook remains broadly balanced over the policy horizon.
“The emergence of new coronavirus variants and delays in easing lockdown measures are seen to pose risks to both demand and inflation,” Diokno said.
Diokno said inflation will likely “decelerate back to within the target by end of the year as the impact of government supply-side measures take effect.”
Nicholas Mapa, ING Bank senior economist, said upward pressure was derived from higher food prices which ticked higher by 4.9 percent “given stubbornly expensive meat items on top of faster inflation for fish and select fruits and vegetables.”
“Given the heft of the food subsector in the overall CPI (consumer price index) basket, we could see inflation pressures elevated in the second half of the year despite extremely soft domestic demand with the impending ECQ (enhanced community quarantine) and ongoing recession. Reports of a possible 3-5 percent increase in the cost of basic food items on top of a possible pickup in fruits and vegetables due to storm damage will all likely translate to elevated food inflation,” Mapa said.
He noted that utilities also exerted pressure on the headline number as higher imported energy costs and supply disruptions in July caused spot prices for electricity to rise.
“Meanwhile, transport costs were the main offset to faster inflation from the food basket despite surging global crude oil prices as base effects from pandemic-related transport fare adjustments reversed,” Mapa said.
Jun Neri, Bank of the Philippine Islands chief economist, said continues to see upside risks “that could keep inflation above 4 percent in the coming months.”
“Despite the recent downtrend in inflation, we are maintaining our full year forecast at 4.3 percent. With the global price of oil at elevated levels, we expect utility costs to reflect this eventually. Electricity distribution companies have started to raise their rates and may continue to do so in the coming months. The price of natural gas from the Malampaya plant is expected to increase soon given its quarterly repricing. Energy companies will likely incorporate the recent depreciation of the Peso into their rates,” Neri said.
Diokno said the BSP “remains watchful over the evolving economic conditions and challenges brought about by the pandemic to ensure that the monetary policy stance remains consistent with its price and financial stability objectives.”
“The Monetary Board will consider the latest price developments and the Q2 2021 GDP outturn in its assessment of the monetary policy stance (next week),” Diokno said.
Key rates of the BSP were kept steady for the fifth straight session during the last policy stance meeting in June as economic recovery momentum remains “tentative.”
The Monetary Board maintained the interest rate on the BSP’s overnight reverse repurchase facility at 2 percent. The interest rates on the overnight deposit and lending facilities were likewise kept at 1.5 percent and 2.5 percent, respectively.
Diokno said although economic activity has improved in recent weeks, “the overall momentum of the economic recovery remains tentative as the threat of COVID-19 (new coronavirus disease 2019) infections continues.”
Mapa said despite possible bouts of faster inflation, they fully expect BSP to keep policy rates unchanged for the rest of 2021 and well into 2022.
“Diokno has repeatedly stated his preference to provide support for the fledgling recovery and deliver monetary stimulus for as long as it is needed. The Philippine economy will likely hit a speed bump in the third quarter with overall economic activity to slow further due to the latest lockdown,” Mapa said
“With the economy reeling from the pandemic, we doubt BSP will even consider pre-emptive recalibration of policy rates as policy tightening at this stage will definitely snuff out whatever momentum is left in the economy’s growth engines,” Mapa said.
Neri, however, said they continue to see the possibility of monetary adjustments in the coming months, “especially given the recent movement in the FX (foreign exchange) market.”
“Aside from inflation, another factor that could challenge the BSP’s ability to keep interest rates steady is a possible shift to a hawkish tilt of the Federal Reserve. The US central bank recently provided a timeline on when it could possibly increase its interest rates, hinting that it could happen in 2023. This means there is a chance that the Fed could start tapering its bond purchases in 2022. Expectations of tighter Dollar liquidity in the coming months might exert pressure on the peso and drain the BSP’s dollar reserves if the policy rate is kept at 2 percent,” Neri said.
He said the Philippines has managed to keep its credit rating despite the huge contraction last year.
“One factor that protected the country from a downgrade is the GIR (gross international reserves) to FX debt ratio. The country’s GIR has increased in the past year given the huge decline in imports and the Dollar printing done by the Fed. But with the US central bank now hinting at the possibility of tighter policy and with imports now increasing, the country’s GIR could decline substantially moving forward,” Neri said.
“The BSP might be forced to increase rates earlier than expected in order to temper the decline in the GIR and protect the country’s credit rating,” he added.
