BSP to adjust inflation forecast

The Bangko Sentral ng Pilipinas (BSP) will likely adjust its full-year inflation forecast amid a recent rally in global oil prices, an official said on Wednesday.

BSP Deputy Governor of the Monetary and Economics Sector Francisco G. Dakila, Jr. said he would present a revised inflation outlook to the Monetary Board at its policy-setting meeting today (Aug. 17).

“Although this is not yet finalized, but actually, there might be a slight upward revision in the inflation outlook because of several developments, mostly in oil,” he told lawmakers during a Senate committee hearing.

The BSP’s latest estimates show average inflation will settle at 5.4% this year, before easing to 2.9% in 2024. The average inflation forecast for 2025 is  3.2%.

The BSP still expects inflation to hit its 2-4% target by the fourth quarter.

Headline inflation slowed for a sixth consecutive month to 4.7% in July, bringing the seven-month average to 6.8%.

Inflation has been declining since its 8.7% peak in January, but this may be affected by recent oil price hikes and rising prices of rice and other food items.

Oil production cuts by the Organization of the Petroleum Exporting Countries and its allies, as well as rising global demand, have pushed crude prices to multi-month highs.

Fuel retailers on Tuesday raised the price of gasoline by PHP 1.90 a liter, PHP 1.50 a liter for diesel, and PHP 2.50 a liter for kerosene. This brought the year-to-date oil price adjustments to a net increase of PHP 13.40 a liter for gasoline, PHP 8.60 a liter for diesel and PHP 5.14 a liter for kerosene.

Mr. Dakila said elevated core inflation, which discounts volatile food and fuel prices, is still a concern.

“Core inflation is still much higher compared with the headline inflation numbers. So, we’re very careful in ensuring that inflation expectations remain anchored to the inflation target. We want to guard against any disanchoring of inflation expectations,” he said.

Core inflation decelerated to 6.7% in July from 7.4% in June. Still, it was higher than 3.9% a year ago. This brought the average core inflation from January to July to 7.6%.    

“The (BSP) governor has been saying, inflation has to first go down to within the inflation target band. Moreover, we should wait for core inflation numbers to also go down, just to make sure,” Mr. Dakila said.

The Monetary Board raised borrowing costs by 425 basis points (bps) from May 2022 to March 2023 to curb inflation. This brought the key rate to its highest in nearly 16 years at 6.25%.

Meanwhile, Mr. Dakila said the BSP’s monetary tightening has had a minimal impact on economic growth.

“We are estimating that the growth impact has so far been minimal. For every 25-bp increase in the policy rate, the reduction in growth would be at just around 1 basis point for 2023,” he said.

“Part of the reason why the impact is minimal is because what really matters is the real interest rate — the interest rate minus the inflation rate. Inflation is still elevated, so in real terms the rate of interest is still quite manageable.”

On Tuesday, BSP Governor Eli M. Remolona, Jr. said if inflation hits 3% next year, the real interest rate will be at 3.25% from a policy rate of 6.25%. This is “low” as the BSP considers it dangerous to go beyond a 6.8% real interest rate.

Gross domestic product (GDP) expanded by 4.3% in the second quarter, much slower than the 6.4% growth in the first quarter and 7.5% a year ago.

For the first semester, GDP growth averaged 5.3%. To achieve the 6-7% target growth, GDP needs to expand by at least 6.6% in the second half.

“I agree with the BSP governor. The economy still has space, albeit small, to accommodate elevated policy rates,” University of Asia and the Pacific Senior Economist Cid L. Terosa said in an e-mail.

“The economy continues to be mightily driven by consumption, which can push businessmen and investors to do their best to cope with current difficulties and to secure their markets in order to gain more when the economy gains greater ground in its recovery,” he said.

Bank of the Philippine Islands Lead Economist Emilio S. Neri, Jr. also agreed with the central bank chief.

“There is no need to get to zero or negative real rates to boost the economy’s performance,” he said in a Viber message.

Mr. Neri noted that the governor might be implying that the BSP could raise the policy rate up to 6.8% without sacrificing growth, if the inflation rate next year is at 3%.

“I guess his computations showing a 3.8% real policy rate is still low enough for growth. It’s short of saying BSP can still hike all the way up to 6.75% without hurting the economy,” he added.

Meanwhile, Makoto Tsuchiya, assistant economist from Oxford Economics Japan, said the economy might not be able to handle a policy rate as high as 6.8%.

“As confirmed by the second-quarter GDP data, the impact of tighter monetary policy is already weighing on the economy. If we look at the outlook, the external sector will suffer from a slowing global economy,” he said.

He expects the BSP to remain on hold for the rest of the year before beginning to cut in the first quarter of 2024. But there are “two opposing forces” that may affect this outlook.

“On one hand, we have weaker currency and supply-side constraints. Many Asian currencies depreciated against the dollar in the past few weeks, in part due to the outlook for lower Chinese growth,” he said.

On Wednesday, the Philippine peso closed at PHP 56.515 a dollar, appreciating by 32.50 centavos from its previous finish of PHP 56.84. Year to date, the peso has depreciated by 1.3% or 76 centavos from its PHP 55.755 close on December 29.

“This should make the BSP more hawkish to avoid pass-through to domestic inflation and capital outflows. On top of this, we now expect inflation to briefly reaccelerate in August given the supply-side disruptions in the food market, particularly vegetables and rice,” Mr. Tsuchiya said.

These factors will likely make the BSP more cautious in easing its monetary policy stance.

However, Mr. Tsuchiya said the Philippine growth outlook is “clouded with slowing global economy and prolonged impact of monetary policy tightening.”

“On balance, we think the BSP will take a wait-and-see approach for the time being, carefully assessing incoming data and calibrating their policy stance,” he added.

A BusinessWorld poll last week showed 13 of 15 analysts predict the Monetary Board will extend its pause today.

After August 17, the BSP will hold policy-setting meetings on September 21, November 16, and December 14. — Keisha B. Ta-asan, Reporter