BPI: Inflation to peak near 7% in October

MANILA, Philippines — Inflation is likely to peak near seven percent in October if global price pressures from oil, energy and food remain substantial, according to the Bank of the Philippine Islands.

BPI lead economist Jun Neri said in a commentary that inflation would remain a challenge until the first half of next year despite the possibility of a slowdown in consumer prices in August due to high base effects.

“Upward pressure on local yields may persist amid stubborn inflationary pressures. Supply disruptions have kept food prices elevated, e.g. refined white sugar, and can remain vulnerable to higher transport costs, trade restrictions, and weather disturbances,” Neri said.

Inflation averaged 4.7 percent in the first seven months, exceeding the BSP’s two to four percent target range, after quickening to 6.4 percent in July from 6.1 percent in June due to the impact of supply disruptions as well as the Russia-Ukraine war.

On Thursday, the BSP raised its inflation forecast to 5.4 percent instead of five percent for this year but reduced its projections to four percent for 2023 and to 3.2 percent for 2024.

BPI sees inflation averaging between five and 5.5 percent for this year from 3.9 percent last year.

To curb rising inflationary pressures, the BSP has lifted interest rates by a total of 175 basis points this year, including the additional 50-basis-point hike last Thursday. The benchmark interest rate now stands at 3.75 percent from an all-time low of two percent.

“Given this, the BSP may hike again by at least 25 basis points in its November policy meeting,” Neri said.

According to the economist, a prolonged period of high inflation would eventually hurt consumers and businesses, which would likely affect the economy more severely compared to higher interest rates.

Even with the latest rate hike, Neri said the economy has enough capacity to absorb the tightening cycles.

He explained the country’s gross domestic product (GDP) growth could slow down a bit because of higher interest rates.

However, he said the slowdown could be worse if inflation continues to rise as household consumption accounts for 70 percent of the economy.,

“Inflation has a more severe impact on consumption,” Neri said.

In 2018 and 2019, the country’s GDP grew by 6.3 percent and 6.1 percent, respectively, even if the policy rate was above four percent.

The aggressive rate hikes by the US Federal Reserve may also prompt the BSP to raise interest rates further until next year.

“This, along with sustained peso depreciation due to import expansion and hawkish Fed policy will likely compel the BSP to keep up with its adjustments through 2023,” Neri said.