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BusinessWorld 4 MIN READ

Central bank sees high probability inflation may breach target band

May 30, 2024By BusinessWorld
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Upside risks to the inflation outlook are seen to persist this year, mainly coming from elevated transport, food, electricity and oil prices, the Bangko Sentral ng Pilipinas (BSP) said.

“The probability of inflation breaching the high end of the (2-4%) target band in 2024 and 2025 remains high, reflecting the possible impact of the various upside risks on the outlook,” it said in its latest monetary policy report.

The BSP said the latest probability distribution shows a “slightly higher likelihood of inflation settling within the target range for 2024” versus the previous round after the baseline forecast was lowered.

The BSP’s baseline forecast for inflation this year is now at 3.5%, while its risk-adjusted forecast is at 3.8%.

For 2025, the BSP’s baseline inflation forecast is at 3.3% while its risk-adjusted forecast is at 3.7%.

However, the probability of inflation falling below the 2-4% target band for this year and next year “remains low,” the central bank said.

The BSP said that the estimated impact of the upside risks was higher now due to upward adjustments in several indicators, such as transport charges and toll rates.

“Higher fares for jeepneys, trains, and taxis, as well as higher toll rates, pose upside risks to inflation,” the BSP said.

“An overall medium probability is assigned to the risk of higher transport charges based on the consumer price index (CPI) weights of the various transport items considered,” it added.

There are petitions to further increase the minimum fare for traditional jeepneys to PHP 15 amid rising oil prices.

“The scenario assumes implementation by the second quarter of 2024 with medium probability, given the recent uptrend in oil prices,” the BSP said.

The central bank also cited petitions to hike the minimum fare for the Metro Rail Transit Line 3 (MRT-3) and proposals to increase the flag-down rate for taxi operators, as well as toll rate adjustments.

Meanwhile, the BSP said higher food costs due to supply constraints may also contribute to the uptick in inflation.

“Below-normal rainfall conditions could affect local rice and corn production, while African Swine Fever (ASF) and Avian Flu continue to threaten the production of pork and poultry,” it said.

“Meanwhile, reduced fishing activities from rising fuel costs, as well as restrictive imports, could result in insufficient fish supply. Moreover, the deficit in sugar and onion supplies are expected in the absence of sufficient import programs.”

The BSP expects elevated rice prices to persist until the third quarter of this year, while the other agricultural commodities are seen to remain elevated until the fourth quarter.

Meanwhile, the central bank warned that electricity rates could also increase this year.

In July last year, the Supreme Court nullified a 2014 order by the Energy Regulatory Commission (ERC) to regulate Wholesale Electricity Spot Market (WESM) prices from November to December 2013.

“The risk scenario assumes that an estimated PHP 15.77 billion worth of power generation cost will be passed on to consumers with the adjustment spread equally over the next three years starting in June 2024,” it said.

It also said it sees a “high probability” for this risk as the ERC is slated to authorize the collection of this power generation cost.

The BSP said an escalation in geopolitical conflicts may drive global crude oil prices higher.

Meanwhile, the Financial Stability Coordination Council (FSCC) said it will continue to monitor volatilities that could impact the economy.

“The volatility in the price and supply of energy-related products can affect economic activity, while a high-for-long global interest rate situation will weigh on debt servicing in general,” FSCC Chairman and Bangko Sentral ng Pilipinas (BSP) Governor Eli M. Remolona, Jr. said.

“These are issues that the FSCC will closely monitor and may address in due course, if warranted,” he added.

The FSCC issued the statement after holding its 39th Executive Committee meeting. The FSCC is an interagency council composed of officials of the BSP, Department of Finance, Securities and Exchange Commission, Insurance Commission and Philippine Deposit Insurance Corp.

The FSCC noted global indicators of market volatility have “remained low.”

“However, it also underscored the volatility in global oil prices. US inflation has come down but remains stubbornly high by the Fed’s own characterization,” it said.

“This suggests a high-for-long policy rate environment, which will likely affect the global economy. In addition, geopolitical risks have been protracted and, in recent cases, escalated.”

The FSCC said that economic growth in the Philippines remains robust.

“Latest data suggest that the full-year inflation is unlikely to breach the upper end of the band. These are reassuring indicators that allow the Philippines greater control over its macro-financial path forward,” it added. — L.M.J.C. Jocson

This article originally appeared on bworldonline.com

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