BSP says it may resort to ‘more drastic’ action if inflation expectations worsen

By Katherine K. Chan, Reporter

THE Bangko Sentral ng Pilipinas (BSP) may resort to “more drastic” action to tame inflation as rising rice prices and transport fares threaten to de-anchor inflation expectations, a senior official said.

“If rice prices (and transport) fares contribute to increases in inflation expectations above the inflation target at some point in the future, it’s going to take more actions, more drastic actions from the central bank to help inflation expectations go back to the target,” BSP Deputy Governor Zeno Ronald R. Abenoja told a webinar on Thursday.

Mr. Abenoja said inflation expectations continue to drift away from the BSP’s target, with the trend expected to persist over the next three years.

“What we are worried about is that the three-year expectations of inflation is shifting consistently upward, and it could go away from the 3% target. So, that is one thing that we are closely watching,” he said.

“And what we are looking at is how fuel, energy, and food, particularly rice, are playing a role in this formation of these expectations in the next one, up to three years forward,” he added.

The BSP deputy governor also noted that rising food prices, especially rice, amid the ongoing energy crisis and the anticipated impact of climate shocks later this year will stoke Philippine inflation, which has accelerated since the war erupted.

In April, headline inflation quickened to an over three-year high of 7.2%, driven by high oil prices feeding into costs of food and utilities.

This was the second month in a row that inflation breached the BSP’s 2%-4% target and its monthly estimate. It had expected inflation to settle between 5.6% and 6.4% last month.

RISKS TILTED TO THE UPSIDE
In a report published late Wednesday, Oxford Economics said the Philippines will experience heavier inflationary pressures as rising food inflation spills over to related baskets such as food service.

“Within Asia, emerging markets are the most exposed due to high food CPI (consumer price index) weights and import dependence, particularly in the Philippines,” it said. “Risks to food inflation remain tilted to the upside from prolonged supply constraints, climate shocks, and a low-probability but high-impact tail risk of a repeat of the food export restrictions seen in 2022-2023.”

Philippine Statistics Authority data showed that the food and nonalcoholic beverages index has the highest share in the CPI basket, with 37.75% of the total.

Meanwhile, BSP’s Mr. Abenoja said central banks in the region face a delicate balancing act as they tighten monetary policy to tame inflation and steer it back toward target over the medium term.

He noted that failure to do so risks faster and steeper interest rate hikes, which pose greater risks to economic growth.

“If we can contain that spillover effect, then we will be doing our job to ensure that inflation will have an uptick in the near term, but over the medium term, it could go back to the target,” Mr. Abenoja said.

“If we lose that influence, if we lose that control, then it will take more actions later on. Interest rates will have to rise much faster and by bigger discrete amounts, and that will be more painful to economic growth,” he added.

Last month, the BSP delivered its first policy rate hike in over two years, raising key borrowing costs by 25 basis points (bps) to 4.5%.

The rate hike, Mr. Abenoja said, was done as a preemptive measure to keep inflation expectations in check and prevent broader second-round effects.

The central bank said this week that it will take “all necessary monetary actions” to bring inflation back to its 3% target within a reasonable time.

BSP Governor Eli M. Remolona, Jr. also earlier noted that the central bank is willing to lift interest rates as much as needed to curb inflation as he remained optimistic on the country’s growth outlook.   

ING Regional Head of Research for Asia-Pacific Deepali Bhargava said another round of tightening next month remains on the table despite the dismal first-quarter growth, with a potential 50-bp hike and an off-cycle move.

“I don’t think today’s GDP (gross domestic product) print will deter (the) BSP from proceeding with a rate hike in June,” she told a separate webinar. “The CPI upside surprise was really large and I think it kind of risks larger and faster rate moves by BSP.”

The Philippine GDP grew 2.8% in the first quarter of the year, the slowest print since the pandemic and below estimates.

Ms. Bhargava also said the peso’s sharp weakening since the war broke out strengthens the case for another hike before the Monetary Board’s June 18 review.

This as she noted that the local unit’s recent recovery is unlikely sustainable.

“And of course… there’s been a sharp depreciation, pressures on the PHP (Philippine peso) as well. So, that could mean that the rate hike would actually come in ahead of the next scheduled policy meeting,” Ms. Bhargava said.

The peso has traded above the P61-a-dollar level since April 28, even slumping to a new record-low close of P61.567 against the greenback on April 29.

UNCERTAIN JUNE HIKE
However, a second straight policy rate hike remains uncertain despite soaring inflation after the Philippine economy posted subpar growth in the first quarter, Pantheon Macroeconomics said.

In a report on Thursday, the United Kingdom-based think tank said the BSP could pause at its next meeting if May inflation turns softer, even as calls for further hikes gain steam.

“(W)e reckon that a second straight rate hike in June is no guarantee, especially once (the) Q1 GDP confirms that growth remains sub-par by historical standards, at best,” Pantheon Macroeconomics Chief Emerging Asia Economist Miguel Chanco and Asia Economist Meekita Gupta said.

The Philippine GDP expanded to a new post-pandemic low of 2.8% in the first quarter of the year, slower than the 3% in the fourth quarter and the 5.4% a year ago.

“The Monetary Board will still have the May CPI report to digest before it meets, and this could be enough to stay its hand if we’re right about a less acute year-over-year acceleration and some signs of stability at the margin,” they added.

Still, Pantheon Macroeconomics raised its inflation forecast to 5.9% from 4.6% for this year.

Meanwhile, Moody’s Analytics said the Philippines’ heavy reliance on imported food, such as rice, leaves the country more exposed to trade disruptions and rising inflation across Southeast Asia.

“Reliance on imported food also plays a significant role across economies within the Association of Southeast Asian Nations. The Philippines stands out as one of the more vulnerable economies in this part of Asia,” Moody’s Analytics Senior Director Gaurav Ganguly, Associate Directors and Senior Economists Stefan Angrick and Denise Cheok said in an analysis.

The think tank added the Middle East war could slash 0.1 to 0.4 percentage point off Asia-Pacific’s growth, with countries like the Philippines also experiencing slower tourism.   

“In addition to the direct energy effects, tourism also takes a hit, doing more damage in tourism-dependent economies such as Thailand, Vietnam and the Philippines,” it said.