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BSP sees higher inflation in July

Lawrence Agcaoili - The Philippine Star
BSP sees higher inflation in July
BSP Governor Benjamin Diokno said the central bank’s Department of Economic Research (DER) sees inflation settling within the 3.9 to 4.7 percent range for July.
STAR / File

MANILA, Philippines — Inflation likely accelerated to 4.3 percent in July after easing to 4.1 percent in June amid rising pump prices of petroleum products, higher electricity rates and the weaker peso, according to the Bangko Sentral ng Pilipinas.

BSP Governor Benjamin Diokno said the central bank’s Department of Economic Research (DER) sees inflation settling within the 3.9 to 4.7 percent range for July.

“Higher prices of domestic petroleum products and key food items along with the upward adjustment in Meralco electricity rates and a weaker peso are the main sources of upward price pressures for the month,” Diokno said.

Year-on-year, the peso has depreciated against the dollar by about 4.7 percent to close at 50.305 to $1 last Thursday from 48.023 to $1 in end-2020 amid broad dollar strength, driven by sentiments due to the potential spread of the more contagious Delta COVID-19 variant and the markets’ perceived shift to a hawkish tone by the US Federal Reserve.

The BSP chief earlier said the observed pick-up in corporate dollar demand  and Fitch Ratings’ outlook downgrade for the country’s sovereign credit rating also created an additional pressure on the peso.

“Recent movements of the peso are reflective of shifts in demand and supply conditions in the foreign exchange market as well as emerging external and domestic developments,” Diokno said.

According to the BSP, the peso is not the only currency that weakened against the dollar as the peso-dollar trend continues to be broadly in line with regional peers.

“While short-run fluctuations in the peso are affected by market sentiment, its medium- to long-term movements are largely supported by economic fundamentals as indicated by the relative stability in the movement of the real effective exchange rate of the peso,” the BSP chief said.

Inflation averaged 4.4 percent in the first half after easing to 4.1 percent in June, staying above the BSP’s two to four percent target due to supply-side shocks such as weather-related disturbances and African swine fever outbreak, which pushed food prices particularly meat higher.

“Moving forward, the BSP will continue to monitor emerging price developments to ensure that its primary mandate of price stability conducive to balanced and sustainable economic growth is achieved,” Diokno said.

ING Bank Manila senior economist Nicholas Mapa said the BSP’s four percent inflation forecast for this year is under threat as the consumer price index would remain elevated in the coming months due to a weaker currency, elevated energy costs and pricey food items.

“We now expect inflation to breach the upper end of the BSP target as the peso remains weak and persistent food inflation keeps price pressures elevated,” Mapa said.

According to Mapa, the BSP will likely look past the breach given its supply side nature and maintain an accommodative monetary policy stance to provide the economy as much support as it can muster amid the current protracted economic downturn.

Mapa said hiking policy rates at a time when the economy is expected to fall below the official target of six to seven percent would likely derail the fragile growth prospects for the country.

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