THE increase in fares, pump prices, recent typhoons, and the depreciation of the peso may have caused inflation to reach as high as 7.9 percent in October, according to the Bangko Sentral ng Pilipinas (BSP).
In its month-ahead inflation forecast, BSP said October 2022 inflation would settle within the range of 7.1 to 7.9 percent. Inflation was at 6.9 percent in September; the October inflation print will be released on Friday, November 4.
“Inflation pressures for the month are expected to emanate from transport fare hikes, elevated domestic petroleum prices, higher agricultural commodity prices due to recent typhoons, and the depreciation of the peso. This could be offset in part by the reduction in electricity rates for Meralco-serviced areas, lower LPG prices, and reduction in prices of fish,” BSP said.
However, BSP expects inflation to “gradually decelerate” in the coming months once the inflation impact of weather disturbances and fare adjustments wane.
“Looking ahead, the BSP will continue to closely monitor emerging price developments to enable timely intervention that could help prevent the further broadening of price pressures, in accordance with the BSP’s price stability mandate,” BSP said.
Ready to use tools
Meanwhile, Central Bank Governor Felipe M. Medalla said BSP is ready to use tools at its disposal to bring inflation back to target. He issued this statement in response to the recent action of Fitch Ratings to maintain the country’s BBB rating with a negative outlook.
Medalla said BSP’s policy toolkit includes interest rate adjustments, a flexible exchange rate, and the use of foreign exchange reserves.
The BSP also supports the implementation by the national government of targeted non-monetary interventions to help address price pressures.
“The BSP consistently signals to the market its unwavering commitment to use the tools at its disposal to address the current challenges brought by monetary policy tightening of advanced economies and its impact on small open economies like the Philippines. This underscores the importance of having a credible central bank,” Medalla said.
Last week, Fitch maintained the outlook on the country’s BBB rating as “negative,” citing risks to the Philippines’s medium-term growth prospects, fiscal adjustment path, and external buffers in an environment of higher interest rates, weaker external demand, and higher commodity prices.
According to Fitch, “BBB” ratings indicate that expectations of default risk are currently low. The capacity for payment of financial commitments is considered adequate, but adverse business or economic conditions are more likely to impair this capacity.
A negative outlook, meanwhile, means Fitch could potentially downgrade the country’s credit rating in the next 12 to 24 months.
Fitch expects the country’s real gross domestic product (GDP) growth at 6.8 percent in 2022, driven by strong domestic demand, reflecting normalization of economic activity after the pandemic and the government’s investment program.
It also forecasts “the general government deficit to narrow to 4.3 percent of GDP in 2022 and 2.4 percent of GDP by 2024, from 4.8 percent of GDP in 2021.”
The Philippines’s net external creditor position is likely to remain stronger than the “BBB” median, according to Fitch. While the rating agency expects the current account deficit (CAD) to widen to 5.0 percent of the GDP in 2022, “the wider CAD is largely driven by higher commodity imports supported by strong domestic demand.”
Fitch forecasts a narrowing of the CAD to 1.8 percent of GDP by 2024. Fitch added that “the emergence of CAD has put pressure on foreign exchange reserves, although we expect reserve coverage to remain ample at about six months of current external payments.”
Based on the latest BSP data, the CAD is financeable considering that liquidity buffers remain robust as of end-September 2022.
Gross international reserves (GIR) stood at $93 billion, representing a more than adequate external liquidity buffer equivalent to 7.4 months’ worth of imports of goods and payments services.
Moreover, the GIR is also about 4 to 6.6 times the country’s short-term external debt. This exceeds the three months’ worth of imports that the International Monetary Fund suggests as a rule of thumb in reserve adequacy.
A sovereign investment-grade rating indicates lower credit risk, thus allowing a country to access funding from development partners and international capital markets at lower cost. This enables a country to channel funds that would have otherwise been allotted for interest payments to socially beneficial programs and projects.
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BSP: October inflation may hit 7.9%, tools at ready
Source: News Paper Radio
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