Inflation seen above 3% for most of 2021

Inflation is seen staying above three percent for the most part of 2021 before easing toward the later part of the year, allowing monetary authorities to maintain their accommodative stance to allow the country to recover from the pandemic-induced recession, according to the Bangko Sentral ng Pilipinas (BSP).

BSP officer-in-charge Francisco Dakila Jr. said during a virtual press conference that inflation would accelerate to 3.2 percent this year before easing to 2.9 percent next year, still within the central bank’s two to four percent target. “From that, you can see that the trajectory of inflation would be above the mid-point of the target,” he said.

Dakila said the uptick in inflation over the past few months is transitory as it is caused by weather-related disturbances particularly Typhoons Rolly and Ulysses as well as higher oil prices that are supply-side.

“The impact of these factors will be concentrated more on the first half of the year and perhaps continuing a little bit into the second half. But later on, inflation can drop to below the midpoint of the target towards the last half of the year again being driven this time by base effects,” Dakila said.

Dakila also said the balance of risk to the inflation outlook is tilted to the downside primarily due to the impact of the pandemic on economic activity.

He said there is no “stagflation” happening as inflation is seen falling within the BSP’s two to four percent target over the policy horizon.

“I don’t think it can be characterized as runaway inflation environment, which is the characteristic of stagflation. Another characteristic of a stagflation airy episode is that the inflation developments begin to feed into expectations,” Dakila said.

To complement the government’s various health and fiscal responses to the pandemic, the BSP kept its accommodative monetary policy stance in the fourth quarter of last year to support the recovery.

The central bank’s liquidity enhancing measures have injected approximately P2 trillion into the financial system, equivalent to about 10 percent of the country’s nominal gross domestic product (GDP).