Sustained inflation jump bolsters 50-bp rate hike

Monetary authorities may opt for another aggressive 50-basispoint (bp) hike in key policy rates this month if inflation breaks past the nine-percent mark in February, according to Bangko Sentral ng Pilipinas (BSP) Governor Felipe Medalla.

Medalla told reporters on the sidelines of the launching of the Paleng-QR Ph Plus in Pasig that the BSP would need to act during its next rate-setting meeting scheduled on March 23 if inflation last month indeed breached the nine percent level.

The BSP expects inflation to range between 8.5 and 9.3 percent in February, with upward price pressures emanating from the elevated prices of key food items such as pork, fish, eggs and sugar as well as liquefied petroleum gas.

On the other hand, the lower prices for domestic petroleum, fruits and vegetables, chicken and beef along with the appreciation of the peso eased price pressures last month.

“The worst case scenario is above nine (percent). Clearly we have to do something. Now, whether it’s 25 or 50 (basis points) depends on the other data,” Medalla said.

Inflation surprised as it accelerated to a fresh 14-year high of 8.7 percent in January, exceeding the central bank’s forecast of 7.5 to 8.3 percent, from 8.1 percent in December.

This prompted the BSP to deliver a back-to-back 50-bp hike on Feb. 16 that brought the benchmark interest rate to a 16-year high of six percent as a strong followthrough monetary policy response to reduce the risk of a breach in inflation target in 2024.

When asked if an above nine percent inflation in February would serve as an impetus for another aggressive 50-bp hike, Medalla replied: “Maybe.”

The last time inflation breached nine percent was in November 2008 at 9.1 percent.

Due to the surprise inflation outturn in January, the BSP raised its inflation forecasts to 6.1 percent from 4.5 percent for 2023 and to 3.1 percent from 2.8 percent for 2024.

The consumer price index (CPI) accelerated to 5.8 percent last year, exceeding the government’s target range, from 3.9 percent in 2021 due to soaring global oil prices amid Russia’s invasion of Ukraine as well as elevated food prices due to supply constraints brought about by China’s zero-COVID policy.

To tame inflation and stabilize the peso that slumped to an alltime low of 59 to $1 in October last year, the BSP has so far raised interest rates by a total of 400 bps since it started its liftoff in May last year.

At the height of the COVID-19 pandemic in 2020, the central bank slashed key policy rates by 200 bps as part of its heavy lifting to cushion the impact of the global health crisis on the economy.

Medalla remains confident that inflation will ease back to within the two to four percent target by the fourth quarter of the year or early next year.

During the briefing of the Development Budget Coordination Committee (DBCC) at the Senate last Tuesday, Medalla said that while food and non-alcoholic beverages are the biggest contributors to inflation, pressures on prices are broadening.

Medalla pointed out that 196 items out of the total 315 items in the CPI basket were above four percent in January and that 123 are food and beverages.

“To put it bluntly, higher prices could beget higher prices. Of course, the scary part is what they call a wage-price spiral: prices are high, wages are high; prices are higher, wages are higher. To make matters worse, if that also results in a vicious cycle where prices are high, the peso is weaker; weaker peso, higher prices, then we will really be in trouble,” he said.

Historically, Medalla said the longest period that headline inflation stayed above four percent was 15 months.

“However, what is evolving is our own (inflation) forecast. Maybe this time, we will have 19 or 20 consecutive months where inflation will be above four percent. This (current) inflation is a lot more serious than what we have experienced since the BSP became an inflation-targeting central bank,” he said.