Central bank sticks to outlook of slower inflation by Q4

INFLATION should peak in the next two months before slowing closer to target, the country’s central bank chief said, noting that tax-related price pressures have been “tapering off.”

Bangko Sentral ng Pilipinas (BSP) Governor Nestor A. Espenilla, Jr. said the biggest price spikes will be seen in August or September, before settling within the 2-4% target band by next year.

“Latest baseline forecasts have shifted higher over the policy horizon, suggesting that inflation will remain elevated in 2018 with the peak occurring sometime in the third quarter, and will revert to the inflation target of 2-4% in 2019,” Mr. Espenilla said in a speech before the Rotary Club of Makati on Tuesday.

Inflation has averaged 4.5% as of end-July as it touched a multiyear high of 5.7% last month.

In response, the central bank fired off its strongest response in a decade as it raised benchmark rates by 50 basis points (bp) in its meeting on Thursday last week, following hikes of 25 bp each in May and June.

Monetary authorities have long conceded to missing their inflation target this year, citing persistent “supply-side” pressures that are beyond the BSP’s purview. Much of the blame has been pinned on rising global oil prices, thinning buffer stocks of cheap rice, as well as the impact of the first of up to five planned tax reforms which imposed additional levies on fuel, cigarettes, alcohol and sugary drinks starting Jan. 1.

“In a supply shock episode, central banks would typically not react, as these historically tend to be transitory or short-lived in nature, but remain vigilant and undertake action against incipient signs of second-round effects,” Mr. Espenilla said. —