Seen move to stop inflation, save peso

MANILA, Philippines – The Bangko Sentral ng Pilipinas (BSP) must be more aggressive in its rate-tightening policy as inflation is expected to pick up further in the coming months and the peso continues to weaken against the dollar , said economists.

Former BSP deputy governor Diwa Guinigundo said the central bank may have to raise its policy rate by 50 basis points in its next two meetings to prevent runaway inflation and save the peso from depreciation.

Guinigundo told The STAR that the BSP’s policy-setting Monetary Council is expected to raise its policy rate by 50 basis points at meetings in August and September to address inflationary pressures and stabilize the peso.

On Thursday, BSP Governor Felipe Medalla said the Monetary Council was ready to trigger a 50 basis point hike on August 18 to raise the benchmark rate from 2.5% to 3%.

Guinigundo also said the Monetary Board may need to call an off-cycle meeting just to tighten monetary policy, especially if inflationary pressures worsen in the second half.

The former central bank official warned that the financial market could be destabilized if the BSP raises its key rate by just 25 basis points, similar to its actions in May and June.

He said that in such a scenario, the market would bet on speculation in the conduct of its trading activities, exposing the peso to worse vulnerabilities and an even faster decline.

“The market can no longer believe that the BSP is serious with its price stability mandate. As a result of this, speculation in the forex market will continue and you would have more than 56 to the dollar. In other words, we want to stop this situation. We need to stop the rapid depreciation of the peso and its possible impact on inflation,” Guinigundo said.

The local currency broke through the 56-$1 level on Thursday to close at 56.06, its weakest level in nearly 17 years, attributed to the Philippines’ soaring current account deficit as import growth outpaced imports. exports.

By raising interest rates, the BSP hopes to increase borrowing costs and, in turn, minimize demand for goods and services to delay rising prices.

Jun Neri, senior economist at the Bank of the Philippines Islands (BPI), said in a comment that inflationary pressures continued to build, fueled by rising oil prices and a weaker peso.

The rise in the consumer price index (CPI) accelerated to 6.1% in June, the highest in more than three years, due to high oil and food prices.

Inflation averaged 4.4% in the first half, beating the BSP’s target range of 2-4%.

“Despite the jump in June, inflation has probably not peaked yet. The headline figure could continue to rise through October assuming oil prices remain at current levels. average should be between 5 and 5.5%,” Neri said.

According to Neri, the contribution of food to inflation is expected to increase further in the coming months given the shortage of certain items on the international market in the context of the Russian-Ukrainian conflict as well as the trade restrictions put in place by exporting countries like India and Indonesia.

Neri said inflationary pressure on global food commodities has not diminished and has been exacerbated by the Russian-Ukrainian war.

Likewise, Neri said the price of rice may increase in the coming months due to the depreciation of the peso and recent developments in the international market.

Neri said demand for substitutes like rice could increase, which could eventually lead to higher world prices amid soaring wheat prices.

The BPI economist said transport’s contribution to inflation would also rise in the coming months after the approved rise in the minimum P2 tariff for utility jeepneys.

“With inflation still on the rise, we continue to expect rate hikes from the BSP through the end of the year. Assuming the central bank continues to gradually increase, pressure on the peso will remain significant as faster rate hikes in the US will make the dollar more attractive,” Neri said.

Aris Dacanay, ASEAN economist at HSBC, said inflation would continue to accelerate in the coming months.

“Nevertheless, inflation could rise further over the next month. Although oil prices have started to moderate, the sharp depreciation of the peso in the second half of June will likely put upward pressure on prices. interiors throughout July,” Dacanay said.

He said the P2 increase in jeepney fares to P11 in June and July would cause headline inflation to rise sharply by 0.6 to 0.7 percentage points.

“The CPI figures also suggest that inflationary expectations, although possibly on the rise, remain manageable so far. The spillover effects from higher transport and food inflation have not been as pronounced. Dacanay said.

As a net importer of goods, Dacanay said currency management could also help manage inflation.

“There is plenty of time between now and the August 18 Monetary Board meeting to gather and review more data. In addition to daily foreign data, statistical authorities would then have released gross domestic product data for the second quarter of 2022 as well as trade statistics for May and June,” Dacanay said.

According to Dacanay, the BSP would have more data to see if the risk of derailing growth is minimal or not.

“An upside growth surprise, similar to the first quarter, will perhaps increase the risk that the BSP will shift gears and rise more aggressively,” Dacanay said.