The Bangko Sentral ng Pilipinas (BSP) is not ruling out the possibility that inflation breached eight percent in November as price shocks, including the impact of Severe Tropical Storm Paeng, continued to feed second round effects. BSP Governor Felipe Medalla told reporters on the sidelines of the 2022 Outstanding Stakeholders Appreciation Ceremonies Tuesday evening that inflation likely quickened further to 7.8 percent in November from a 14-year high of 7.7 percent in October.
“Our forecast of inflation for the month (November) is 7.8 (percent) still. But because our forecast errors use plus or minus four, we’re not ruling out let’s say 8.2 (percent),” Medalla said.
“There are still large shocks that are there and in some of the shocks already inviting second order effects like adjustments of transport prices, adjustment of electricity rates,” the BSP chief said.
Medalla said the aggressive rate hikes delivered by the US Federal Reserve have somewhat addressed high inflation in the US.
“Rates are not expected to have those jumbos 75 (basis points). So it’s a good sign because that means the pressure on the exchange rate is now practically gone because the peso and other currencies have appreciated,” he said.
After depreciating by as much as 15.7 percent to hit an all-time low of 59 to $1 last October, the peso has bounced back strongly to the 56 to $1 handle amid the active participation of the BSP in the foreign exchange market, as well as the series of rate hikes delivered by the Monetary Board to maintain a 100-basis-point differential with US interest policy rates.
Last Nov. 17, the BSP delivered another huge 75-basis-point hike to help insulate the economy from external headwinds and exchange rate fluctuations that could entrench price pressures and potentially dislodge inflation expectations.
The central bank has already raised key policy rates by 300 basis points, bringing the overnight reverse repurchase rate to a 14-year high of five percent from an all-time low of two percent.
Inflation averaged 5.4 percent from January to October this year, breaching the BSP’s two to four percent target range.
In its latest assessment, the central bank’s Monetary Board raised its inflation forecasts to 5.8 instead of 5.6 percent this year, 4.3 instead of 4.1 percent next year, and 3.1 instead of three percent in 2024.
In a separate statement, the BSP said inflation in November likely settled within the range of 7.4 to 8.2 percent.
“Upward price pressures for the month are expected to emanate from higher electricity rates, uptick in the prices of agricultural commodities due to Severe Tropical Storm Paeng, and higher LPG prices,” the central bank said.
On the other hand, it said the reduction in petroleum and pork prices as well as the peso appreciation could contribute to easing price pressures for the month.
“More importantly, inflation is projected to gradually decelerate in the succeeding months as the cost-push shocks to inflation due to weather disturbances and transport fare adjustments dissipate,” it said.
According to the central bank, the timely implementation of non-monetary measures will also help temper price pressures in the months ahead.
“The BSP continues to monitor closely emerging price developments to enable timely intervention that could help prevent the further broadening of price pressures, in accordance with the BSP’s price Inflation stability mandate,” the BSP said.
Medalla also said that a pause from the current tightening cycle is possible as early as the first quarter of next year if the peso would continue to appreciate against the US dollar paving the way for the return of inflation within the two to four percent target range.
Based on his best-case scenario, Medalla believes that there is a pause by the Fed by the first quarter of next year.
Medalla said the central bank could respond to the moves of the US Fed fully or partially depending on the data.
He said inflation is likely to ease within the BSP’s two to four percent target range by the middle of next year.