The Bangko Sentral ng Pilipinas (BSP) is ready to take all monetary policy actions to attain the country’s inflation targets amid rising commodity prices.
On Thursday, the Philippine Statistics Authority (PSA) reported the country’s headline inflation rate reached 8.1 percent in December and averaged 5.8 percent in 2022. (See story here: https://businessmirror.com.ph/2023/01/05/ph-inflation-up-8-1-in-december/)
The BSP said in a statement that given the high inflation recorded in December, the country’s “inflation outlook remains tilted to the upside” this year but “broadly balanced” next year.
“The BSP remains prepared to take all monetary policy action necessary to bring inflation back to a target-consistent path over the medium-term,” the BSP said in a statement.
“The BSP also continues to support the timely implementation of non-monetary government measures to mitigate the impact of persistent supply-side pressures on inflation,” it added.
BSP said these upside risks include local trade restrictions as well as increased prices of fruits and vegetables due to weather disturbances.
Other factors that could increase inflation include higher sugar prices, pending petitions for transport fare hikes, and potential wage adjustments in 2023.
“The expected upside risks to inflation over the policy horizon stem mainly from elevated international food prices due to high fertilizer prices and supply chain constraints,” the BSP said.
Rate hikes
Given the high inflation in December and core inflation climbing to 6.9 percent, also the highest on record according to the Philippine Statistics Authority (PSA), a bank believes the BSP is poised to make another rate hike.
BPI said demand remained strong due to “revenge spending” which could continue to drive inflation in the next two quarters. Increasing interest rates, BPI said, could help keep inflation within target.
“With inflation still on an upward trend, the BSP may need to hike its policy rate further in the first half of the year,” BPI said in a statement.
“The hiking cycle of the Federal Reserve has not ended. The central bank will likely continue to hike in the next two quarters,” it added.
However, BPI expects that the direction of interest rates in the second semester of the year will change depending on the decision of the Federal Open Market Committee (FOMC).
BPI said if the FOMC decides to cut interest rates on the back of a recession in the United States, the BSP could also follow suit.
Under this scenario, BPI said the FOMC may bring down interest rates to a level closer to 3 percent while the BSP’s policy rate may peak at 6.5 percent this year.
“The BSP will likely deliver their own cuts following the Fed, but still maintain the 100 to 200 bps differential with US rates. The BSP policy rate could go down to 4.75 percent in the latter part of 2023 if this happens,” BPI said.
In a press briefing after its last policy rate setting, BSP Governor and Monetary Board (MB) Chairman Felipe M. Medalla said the MB raised interest rates on the BSP’s overnight repurchase facility by 75 basis points (bps) to 5 percent from 4.25 percent.
This is the highest overnight repurchase facility interest rate level since February 2009, during the Global Financial Crisis, when it was also at 5 percent.
Medalla said inflation in the second semester of 2023 will be closer to 3 percent than 4 percent. This lends some optimism that inflation could average 3.1 percent in 2024 from the previous forecast of 3.2 percent.
Risks to the BSP’s inflation outlook are “strongly skewed to the upside” especially for 2023 “but broadly balanced for 2024.”
The possible impact of transport fare hikes and the higher prices of vegetables and fruits are considered medium upside risks to the inflation forecast of Monetary Authorities.