Inflation slows down, but rate hikes still likely

INFLATION could slow further after falling to 8.6 percent in February from a 14-year high of 8.7 percent in January, the Bank of the Philippines (BPI) said.

“There is a significant possibility that headline inflation may have already peaked and subsequent releases will be lower in the future,” Ayala-led bank said in a report.




It says that transport’s contribution to inflation could continue to decline if oil prices remain stable. The decline is likely to be gradual due to non-oil upside risks.

However, high food prices remain a concern.

“The agricultural sector continues to grapple with structural problems that prevent it from keeping pace with the growing population of the country,” the BPI said in a statement.

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“Imports will help alleviate price pressures, but this is only a short-term solution,” the company added.

Annual inflation, according to the BPI, could settle “around 5.8 percent”, below the upwardly revised 6.1 percent level announced by the Monetary Board last month after the inflation spike in January.

Bangko Sentral ng Pilipinas (BSP), which expects inflation to return only to a target range of 2.0 to 4.0% next year, said on Tuesday that the 2023 forecast would be revised at the next policy meeting on March 23.

He noted that inflation is projected to remain high for most of the year and that risks to the inflation outlook remain skewed upward in both 2023 and 2024.

The currency board predicts 3.1% next year.

Meanwhile, as core inflation continues to rise, BPI said monetary authorities may need to further raise key interest rates.

Core inflation, excluding volatile food and energy, rose to 7.8% from 7.4% a month earlier.

In addition to domestic inflation, the amount of the increase will depend on the upcoming data from the US, the reaction of the US Federal Reserve and the behavior of the foreign exchange markets.

“So far, the markets are still looking for a 25 basis point increase in March. [21-22] FOMC (Federal Open Market Committee) meeting, but the upside surprise could be bolstered by upcoming US economic data and policy decisions.

The monetary authorities have raised key interest rates by 400 basis points (bp) since last year to curb inflation, the latest increase of 50 bp. in February.

Ahead of the release of last month’s inflation results, central bank chief Felipe Medalla said monetary authorities remain hawkish and ready to act if consumer price growth continues to pick up.

The BSP discount rate is currently 6.0 percent, a level last seen in August 2008 when the Monetary Authority took action to mitigate the effects of the global financial crisis.

Interest rates on overnight deposits and BSP credit lines are currently 5.5% and 6.5% respectively.

On Tuesday, the central bank said its “top monetary policy priority remains bringing inflation back to the government’s target.”

“BSP stands ready to adjust its monetary policy settings as needed to ensure price stability over the medium term,” he added.

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