BSP expects inflation to spike in January

MANILA, Philippines — Inflation likely accelerated to a range of 2.5 percent to 3.3 percent in January from a six-month high of 2.5 percent in December, according to the Bangko Sentral ng Pilipinas (BSP).

The central bank’s Department of Economic Research (DER) said inflation may settle within the 2.5 percent to 3.3 percent range in January amid the upward price pressures from higher prices of LPG and selected food items as well as the adjustments in excise taxes on tobacco products.

The BSP said inflation last month was tempered by the lower electricity rates in Meralco serviced-areas as well as the series of rollbacks in fuel prices.

“Moving forward, the BSP will continue to monitor evolving price trends to ensure that the monetary policy stance remains consistent with the mandate of maintaining price stability conducive to economic growth,” the central bank said.

BSP Governor Benjamin Diokno said earlier the eruption of Taal Volcano could put upside pressure on inflation in the next couple of months, but would have minimal impact on the economy in the first quarter.

However, he was quick to clarify that the impact of the eruption of Taal Volcano is likely to be only temporary, especially if volcanic activity continues to subside.

“The impact of the eruption could result in a slightly lower growth outturn in the first quarter. While we do not expect this to substantially dampen the country’s overall growth prospects for 2020, we are mindful that the threat of a more dangerous eruption has not fully dissipated,” Diokno said.

The BSP chief told reporters preliminary indications suggest that the disruption to agriculture, industry, and services in the surrounding areas could have a minimal impact on gross domestic product (GDP) growth.

Security Bank chief economist Robert Dan Roces said the impact of Taal’s eruption appears to have moderated and cost-push effects may be fully felt by February as agricultural activities resume in the affected areas.

Roces said inflation last month likely picked up to 2.9 percent amid the uptick in fish and vegetable prices, while the surge in oil price futures during the US-Iran tensions have not pushed up domestic pump prices.

“Near term upside risks to inflation include possible constraints to rice as Thailand and Vietnam will be reducing exports,” Roces said.

Meanwhile the BSP chief told reporters preliminary indications suggest that the disruption to agriculture, industry, and services in the surrounding areas could have a minimal impact on the country’s gross domestic product (GDP) growth in the first quarter.

Diokno said the government estimates a foregone income at about P4.3 billion to P6.7 billion or less than one percent of the output in Calabarzon in 2018.

“Growth outlook for 2020 is not expected to be substantially dampened,” he said.

He said affected commodities include coffee, cacao, pineapple, assorted fruits and vegetable, rice, coconut and fish.

“As with prior episodes of volcanic eruptions in the country, inflation could show a slight uptick in the coming months. Nevertheless, the increase is likely to be temporary, with price pressures easing in the following months,” Diokno said.

According to the BSP, the Monetary Board will continue to monitor these developments as it prepares for the review of the country’s monetary policy stance on Feb. 6.

Based on its last assessment, the Monetary Board expects inflation to pick up to 2.9 percent in 2020 and 2021 after easing to 2.5 percent last year from 5.2 percent in 2018.

However, the BSP chief said his earlier statement about a 50 basis points rate cuts this year still holds despite the series of external and domestic headwinds including the eruption of Taal Volcano.

The benign inflation environment and slower-than-expected GDP growth of 5.9 percent last year allowed the central bank to slash interest rates by 75 basis points, partially unwinding a tightening cycle that saw benchmark rates jump by 175 basis points in 2018.

The BSP’s Monetary Board also lowered the reserve requirement ratio for big and mid-sized banks by 400 basis points and for small banks by 200 basis points to release about P450 billion to boost economic activity.