The Bangko Sentral ng Pilipinas (BSP) yesterday said inflation for the month of August may have reached a high of 6.7 percent as prices of key food commodities continue to rise.
In a statement, BSP said inflation for the month will likely settle between 5.9 percent and 6.7 percent, higher than the previous month’s forecast range of between 5.6 percent and 6.4 percent.
“Inflation for the month (August) was driven by the continued increase in key food prices, but could be offset in part by the decline in global oil prices, the reduction in electricity rates, lower meat and fish prices, and appreciation of the peso,” BSP said.
Headline inflation increased to 6.4 percent year-on-year in July from 6.1 percent in the previous month.
The resulting year-to-date average inflation of 4.7 percent is above the government’s average inflation target range of between 2 percent and 4 percent for 2022.
According to the BSP, inflationcontinued to increase in July “owing mainly to faster price increases of food items.”
“Year-on-yearinflationfor flour and meat increased further while sugarinflationalso went up due to some tightness in supply mainly attributed to reduced domestic sugar output,” BSP said.
Limited supply was also linked to recent weather-related disturbances, which also pushed fishinflationhigher.
“On the other hand, year-on-year non-foodinflationwas steady as lowerinflationfor health as well as large-weighted housing and utilities (water and electricity, gas, and other fuels) offset theinflationuptick in other non-food subcomponents,” BSP said.
For the fourth consecutive time this year, the Monetary Board in August decided to raise the key rates of the BSP as latest inflation forecasts have shifted higher and likely to have breached the government’s target.
BSP’s overnight reverse repurchase facility went up by 50 basis points (bps) to 3.75 percent. The interest rates on the overnight deposit and lending facilities were raised to 3.25 percent and 4.25 percent, respectively.
The Monetary Board has raised the key rates by a total of 175 bps to combat broadening price pressures.
Felipe Medalla, BSP governor, said the BSP’s latest baseline forecasts have shifted higher for 2022 with average inflation projected to breach the upper end of the 2-4 percent target range at 5.4 percent.
“While the forecasts for 2023 and 2024 have declined to 4.0 percent and 3.2 percent, respectively, the inflation target remains at risk over the policy horizon owing to broadening price pressures,” Medalla said.
He also stressed that “elevated inflation expectations likewise highlight the risk of further second-round effects.”
“Headline will still increase and will probably peak on the 10th or 11th month of this year.
Naturally, inflation will still be high by the first quarter of next year and will start to go down by the second half. Of course, all of these will depend on several factors. On the local front, it will be easier if we are able to address local supply pressures,” Medalla said.
Upside risks, according to Medalla, also continue to dominate the inflation outlook up to 2023.
“(These are) due to the potential impact of higher global non-oil prices, the continued shortage in domestic fish supply, the sharp increase in the price of sugar, as well as pending petitions for transport fare increases,” Medalla said.
Meanwhile, he said the “impact of a weaker-than-expected global economic recovery as well as the resurgence of local COVID-19 infections continue to be the main downside risks to the outlook.”
At the same time, Medalla said despite some moderation in economic activity in recent months, overall domestic demand conditions have generally held firm, supported by improved employment outturns and by ample liquidity and credit.
“For these reasons, the Monetary Board deemed further monetary action to be necessary to anchor inflation expectations and avoid a further breach in the inflation target over the policy horizon. The favorable growth outcome in the first half of the year also gives the BSP the flexibility to act against inflation pressures while allowing domestic demand to sustain its recovery momentum amid prevailing headwinds,” Medalla said.
A contractionary policy, by raising rates, limits the outstanding money supply to slow growth and decrease inflation and reduce the level of money circulating in the economy.
“We have to be data dependent. Thus far, we think our recovery is respectable enough to absorb further hikes. It is impossible for tightening to not reduce growth. However, respectable growth is still possible. But to us, price stability is the major concern. I wish I could tell you that this one is the last or the next one,” Medalla said.
