‘More rate hikes needed as inflation still to peak’
Ayala-led Bank of the Philippine Islands (BPI) believes inflation has not peaked yet despite quickening to 6.1 percent in June from 5.4 percent in May and is expected to average between five and 5.5 percent this year.
BPI lead economist Jun Neri said in a commentary that inflation is likely to accelerate until October this year.
“Despite the jump in June, inflation has probably not peaked yet. The headline figure may continue to go up until October assuming oil prices will stay at current levels. In this scenario, average inflation is expected to settle between five and 5.5 percent,” Neri said.
Inflation averaged 4.4 percent in the first half of the year, breaching the BSP’s two to four percent target range. The BSP Monetary Board recently raised its inflation forecasts to five instead of 4.6 percent for this year and to 4.2 instead of 3.9 percent for next year.
To help manage spillovers from other countries that could potentially disanchor inflation expectations, the BSP Monetary Board delivered its biggest rate hike in 20 years after it raised interest rates by 75 basis points in a surprise off-cycle rate setting meeting last July 14.
The jumbo rate hike preceded the back-to-back 25 basis points rate hike on May 19 when it started its interest rate liftoff followed by another one on June 23 to curb rising inflationary pressures.
This brought the benchmark rate to 3.25 percent. It would be recalled that the BSP slashed interest rates by 200 basis points, including the 50 basis points delivered in April 2020, as part of its COVID-19 pandemic measures to cushion the impact of the global health crisis on the economy.
The Cabinet-level Development Budget Coordination Committee (DBCC) recently lowered anew the country’s gross domestic product (GDP) growth target to a range of 6.5 to 7.5 percent from the revised seven to eight percent for this year. Economic managers originally pegged the target at seven to nine percent.
Neri said the central bank’s Monetary Board is likely to raise key policy rates by another 25 basis points on Aug. 18.
“Even with the aggressive rate hike, we believe the economy has enough capacity to absorb this. GDP growth may slow down a bit because of higher interest rates, but it might be worse if inflation goes up further,” Neri warned.
He said household consumption accounts for 70 percent of the economy and that inflation has more severe impact on consumption.
Neri pointed out that the economy managed to grow by 6.3 percent in 2018 and 6.1 percent in 2019 even if the policy rate was above four percent.
“A prolonged period of high inflation will eventually hurt consumers, which will likely affect the economy more severely compared to higher interest rates,” Neri said.