BE WARY OF UPSIDE INFLATION RISK FROM RISING OIL PRICES, BSP TOLD

Pantheon Macroeconomics has warned Philippine monetary authorities to not let their guard down given the upside inflation risks coming from normalizing global oil prices.

After the Bangko Sentral ng Pilipinas’ (BSP) Monetary Board kept the policy rate at a record-low of 2 percent last Wednesday, Pantheon Macroeconomics senior Asia economist Miguel Chanco said the central bank seemed to have become “overly confident about the inflation outlook.”

Chanco noted the revision in the BSP’s 2021 inflation forecast to 3.9 percent from 4.2 percent. This, he said, implied that the central bank “believes that inflation has peaked.”

“We are skeptical of this view,” he said in a report on Friday.

End-April headline inflation averaged 4.5 percent, above the 2-4 percent target range, mainly due to expensive food, especially pork.

“The BSP partly cited the lower-than-expected inflation readings over the last two months for the downgrade. But this moderation was due primarily to the price cap on meat, which has since lapsed,” Chanco pointed out.

“The [BSP] also mentioned the government’s recent decision to lower tariffs on imported pork to alleviate the shortages caused by swine flu domestically. This may not hold water, as prices globally are rising rapidly, too, in large part due to China’s massive imports to plug similar flu-induced gaps,” he added.

“Equally as egregious, the BSP upgraded its oil forecasts further, but they also imply that prices have essentially peaked. Crucially, even if the steady recovery in prices we expect does not materialize, the gains already realized point to a massive spike in the contribution from utilities inflation in the months ahead,” Chanco said, adding that he was expecting “double- digit transport inflation will stay sticky.”

“Inflation will see another shift up before peaking in the third quarter, at over 6 percent,” he said.

The Department of Finance (DOF) earlier warned the Philippines might not yet be out of the woods from high inflation not only due to the year-on-year jump in oil prices following demand recovery from last year’s pandemic-induced slump, but also from more expensive corn, an input in animal feed manufacturing.

State planning agency National Economic and Development Authority (Neda) had also said “the government needs to be vigilant to developments in the international oil market amid tight international supply and recovery in global demand,” citing that oil-producing countries “remained committed to lowering the overall crude oil production.”