By Katherine K. Chan, Reporter
THE Bangko Sentral ng Pilipinas (BSP) may resort to “more drastic” motion to tame inflation as rising rice prices and transport fares threaten to de-anchor inflation expectations, a senior official said.
“If rice prices (and transport) fares contribute to increases in inflation expectations above the inflation goal sooner or later in the long run, it’s going to take more actions, more drastic actions from the central bank to assist inflation expectations return to the goal,” BSP Deputy Governor Zeno Ronald R. Abenoja told a webinar on Thursday.
Mr. Abenoja said inflation expectations proceed to drift away from the BSP’s goal, with the trend expected to persist over the subsequent three years.
“What we’re anxious about is that the three-year expectations of inflation is shifting consistently upward, and it could go away from the three% goal. So, that’s one thing that we’re closely watching,” he said.
“And what we’re taking a look at is how fuel, energy, and food, particularly rice, are playing a task on this formation of those expectations in the subsequent one, up to 3 years forward,” he added.
The BSP deputy governor also noted that rising food prices, especially rice, amid the continuing energy crisis and the anticipated impact of climate shocks later this yr will stoke Philippine inflation, which has accelerated for the reason that war erupted.
In April, headline inflation quickened to an over three-year high of seven.2%, driven by high oil prices feeding into costs of food and utilities.
This was the second month in a row that inflation breached the BSP’s 2%-4% goal and its monthly estimate. It had expected inflation to settle between 5.6% and 6.4% last month.
RISKS TILTED TO THE UPSIDE
In a report published late Wednesday, Oxford Economics said the Philippines will experience heavier inflationary pressures as rising food inflation spills over to related baskets similar to food service.
“Inside Asia, emerging markets are essentially the most exposed as a result of high food CPI (consumer price index) weights and import dependence, particularly within the Philippines,” it said. “Risks to food inflation remain tilted to the upside from prolonged supply constraints, climate shocks, and a low-probability but high-impact tail risk of a repeat of the food export restrictions seen in 2022-2023.”
Philippine Statistics Authority data showed that the food and nonalcoholic beverages index has the best share within the CPI basket, with 37.75% of the entire.
Meanwhile, BSP’s Mr. Abenoja said central banks within the region face a fragile balancing act as they tighten monetary policy to tame inflation and steer it back toward goal over the medium term.
He noted that failure to accomplish that risks faster and steeper rate of interest hikes, which pose greater risks to economic growth.
“If we will contain that spillover effect, then we will likely be doing our job to make sure that inflation could have an uptick within the near term, but over the medium term, it could return to the goal,” Mr. Abenoja said.
“If we lose that influence, if we lose that control, then it can take more actions afterward. Rates of interest could have to rise much faster and by greater discrete amounts, and that will likely be more painful to economic growth,” he added.
Last month, the BSP delivered its first policy rate hike in over two years, raising key borrowing costs by 25 basis points (bps) to 4.5%.
The speed hike, Mr. Abenoja said, was done as a preemptive measure to maintain inflation expectations in check and forestall broader second-round effects.
The central bank said this week that it can take “all needed monetary actions” to bring inflation back to its 3% goal inside an inexpensive time.
BSP Governor Eli M. Remolona, Jr. also earlier noted that the central bank is willing to lift rates of interest as much as needed to curb inflation as he remained optimistic on the country’s growth outlook.
ING Regional Head of Research for Asia-Pacific Deepali Bhargava said one other round of tightening next month stays on the table despite the dismal first-quarter growth, with a possible 50-bp hike and an off-cycle move.
“I don’t think today’s GDP (gross domestic product) print will deter (the) BSP from proceeding with a rate hike in June,” she told a separate webinar. “The CPI upside surprise was really large and I feel it form of risks larger and faster rate moves by BSP.”
The Philippine GDP grew 2.8% in the primary quarter of the yr, the slowest print for the reason that pandemic and below estimates.
Ms. Bhargava also said the peso’s sharp weakening for the reason that war broke out strengthens the case for one more hike before the Monetary Board’s June 18 review.
This as she noted that the local unit’s recent recovery is unlikely sustainable.
“And naturally… there’s been a pointy depreciation, pressures on the PHP (Philippine peso) as well. So, that would mean that the speed hike would actually are available ahead of the subsequent scheduled policy meeting,” Ms. Bhargava said.
The peso has traded above the P61-a-dollar level since April 28, even slumping to a brand new record-low close of P61.567 against the greenback on April 29.
UNCERTAIN JUNE HIKE
Nevertheless, a second straight policy rate hike stays uncertain despite soaring inflation after the Philippine economy posted subpar growth in the primary quarter, Pantheon Macroeconomics said.
In a report on Thursday, the United Kingdom-based think tank said the BSP could pause at its next meeting if May inflation turns softer, at the same time as calls for further hikes gain steam.
“(W)e reckon that a second straight rate hike in June is not any guarantee, especially once (the) Q1 GDP confirms that growth stays sub-par by historical standards, at best,” Pantheon Macroeconomics Chief Emerging Asia Economist Miguel Chanco and Asia Economist Meekita Gupta said.
The Philippine GDP expanded to a brand new post-pandemic low of two.8% in the primary quarter of the yr, slower than the three% within the fourth quarter and the 5.4% a yr ago.
“The Monetary Board will still have the May CPI report back to digest before it meets, and this might be enough to remain its hand if we’re right a couple of less acute year-over-year acceleration and a few signs of stability on the margin,” they added.
Still, Pantheon Macroeconomics raised its inflation forecast to five.9% from 4.6% for this yr.
Meanwhile, Moody’s Analytics said the Philippines’ heavy reliance on imported food, similar to rice, leaves the country more exposed to trade disruptions and rising inflation across Southeast Asia.
“Reliance on imported food also plays a major role across economies throughout the Association of Southeast Asian Nations. The Philippines stands out as one in every of the more vulnerable economies on this a part of Asia,” Moody’s Analytics Senior Director Gaurav Ganguly, Associate Directors and Senior Economists Stefan Angrick and Denise Cheok said in an evaluation.
The think tank added the Middle East war could slash 0.1 to 0.4 percentage point off Asia-Pacific’s growth, with countries just like the Philippines also experiencing slower tourism.
“Along with the direct energy effects, tourism also takes a success, doing more damage in tourism-dependent economies similar to Thailand, Vietnam and the Philippines,” it said.