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Business

Inflation may breach this year’s target

Lawrence Agcaoili - The Philippine Star
Inflation may breach this yearâs target
A mask-wearing woman buys vegetables in a market on January 5, 2021.
The STAR / Boy Santos, file

MANILA, Philippines — The incoming governor of the Bangko Sentral ng Pilipinas (BSP) sees inflation breaching the two to four percent target by 1.5 to 1.7 percent this year on soaring oil and commodity prices.

Monetary Board member and incoming BSP chief Felipe Medalla told “The Chiefs” on Cignal’s TV’s One News/TV5 that private forecasters are expecting the consumer price index to accelerate to around 5.4 to 5.7 percent this year.

Inflation accelerated to 5.4 percent in May from 4.9 percent in April, bringing the average to 4.1 percent and exceeding the BSP’s two to four percent target range.

This was the highest inflation for more than three years or since the 6.1 percent average recorded in November 2018.

Medalla said the elevated inflation and the stronger-than-expected gross domestic product (GDP) growth of 8.3 percent in the first quarter prompted the Monetary Board to kick off its interest rate liftoff.

Last May 19, the BSP delivered a 25-basis-point rate hike, the first in more than three years or since November 2018, to curb rising inflationary pressures.

According to the former director general of the National Economic and Development Authority (NEDA), the impact of monetary actions would be felt by the economy after six to nine months.

“So therefore, what we call the lag or the effect of inflation and our actions could be as long as six to nine months. So that’s why we are saying that we will really miss our target this year. Not just miss it, but miss it by 1.5 to 1.7 percent. That’s a lot,” Medalla said.

For 2023, the incoming BSP chief said inflation may ease to within the government’s two to four percent target range.

Medalla said the Monetary Board is likely to raise interest rates by another 25 basis points on Thursday and by another 25 basis points in August as part of its gradual tightening.

“The momentum of inflation is something that we cannot, as a central bank, regulate. What we’re trying to do is reduce the so-called second order or knock-on effects,” Medalla said.

Economists and analysts penned a 50-basis-point rate hike this week as the hawkish US Federal Reserve raised key policy rates by 75 basis points last June 15, the highest since 1994 to control its runaway inflation.

“So those guys who are saying we are not doing enough – we are doing a balancing act. What we care about is Philippine inflation,” Medalla said.

On the weakening peso, Medalla said the pass-through is, every one percent of change in exchange rate passes only 0.04 percentage point to inflation.

“So those guys who say the way to control inflation is to raise interest rates, they are not aware that the pass-through from the exchange rate to inflation is extremely low, especially if the dollar is the only currency that is strengthening,” Medalla said.

He said the link between the peso, which pierced the 54 to $1 level on Monday, is not a very strong one as the local currency is stable and the BSP is credible.

Medalla told The STAR that the situation in the Philippines is different from the United States, which has implemented a massive stimulus package to revive the economy amid the COVID-19 pandemic.

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