December 7, 2022

Filipino Guardian

Sentinels of Filipino Free Press

Aggressive rate hikes may be required

3 min read

Jeepneys wait for passengers at the EDSA-Aurora Boulevard intersection in Quezon City on June 9. The minimum fare for jeepneys rose to 12p from October, likely fueling inflation. — FILIPINO STAR/ MIGUEL DE GUZMAN

More aggressive monetary tightening by the central bank may be required if inflation continues to accelerate, economists said.

“Not to unanchor inflation expectations may require more aggressive monetary tightening to further slow exchange rates and switch to domestic prices,” said Emilio S. Neri, Jr., lead economist at the Bank of the Philippine Islands (BPI), in a Viber message .

Bangko Sentral ng Pilipinas (BSP) on Monday forecast inflation to settle in the 7.1-7.9% range in October, well above the 2-4% target range.

A BusinessWorld poll of 14 analysts conducted last week gave a median estimate of 7.2% for October annual inflation. The Bureau of Statistics will release last month’s inflation data on November 4th.

“There needs to be flexibility to not just fit, but to hike more than the Federal Reserve to avoid inflation staying high for an extended period. Persistent inflation may eventually undermine future growth prospects,” Mr Neri said.

Calixto V. Chikiamco, board member of the Institute for Development and Econometric Analysis, told BusinessWorld Live on One News that BSP will hike rates later this month to tame inflation and match the Fed’s tightening.

“The government said it will agree with the Fed point by point, so we can probably expect that… We’ll only see a slowdown if the Fed stops raising rates,” he said.

The US Federal Reserve is widely expected to hike rates by three-quarters of a percentage point at its monetary policy meeting this week, bringing the overnight lending rate target to a range of 3.75% to 4%.

GNP Governor Felipe M. Medalla said last week that the Monetary Board could raise interest rates by 75 basis points (bps) at its Nov. 17 meeting if the Fed makes a hike of the same magnitude. BSP has hiked rates by 225 basis points this year to tame inflation.

“What will happen is we will see the economy slow down… We are still very positive, at 5-6% (Gross Domestic Product) but probably in the lower range with rate hikes as that will hit rate value sensitive sectors like cars, houses, etc.,” Mr Chikiamco said.

The economy grew 7.8% in the first half, still within the government’s full-year target of 6.5-7.5%. Third quarter GDP data is due to be released on November 10th.

If the upper end of the October GNP inflation forecast is met, it would be the fastest pace in over 14 years or since the 9.1% print in November 2008.

However, the BSP said inflation would “gradually slow” over the next few months as “cost-push shocks to inflation from weather disruptions and adjustments in transport prices ease”.

“My concern is that we haven’t seen the peak yet as we head towards the holiday season,” Mr Chikiamco said, adding that there is stronger demand for goods during the holiday season.

“Winter is coming; therefore, oil prices worldwide could rise again, and of course this is the lean season for fishing, so this may also contribute to further inflation,” he added.

Mr Neri said inflation could slow in the coming months but stay above GNP’s target range of 2-4%.

“Inflation could slow somewhat but remain well above target well into 2024 if structural reforms to improve the supply side are not addressed and demand factors causing currency weakness are not mitigated,” he added.

Asian Institute of Management economist John Paolo R. Rivera said in a Viber message that inflation could rise further ahead of the holiday season.

“However, inflation is expected to slow after the holidays or in early 2023 due to lower demand and the impact of GNP monetary tightening,” he added.

At its September 22 monetary policy meeting, the central bank raised its average inflation forecast for this year to 5.6% from 5.4% previously, beating the 2-4% target.

For 2023, GNP expects inflation to average 4.1% before falling to 3% in 2024. – Keisha B. Ta-asan

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