Philippines: BSP seen raising inflation target

MANILA, Philippines — The Bangko Sentral ng Pilipinas (BSP) is expected to upgrade its inflation forecast for the year as oil prices soar, but it will be in no rush to move toward normalization.

In a report, international think tank Pantheon Macroeconomics said the Bangko Sentral ng Pilipinas (BSP) is likely to raise its inflation assumption for 2022.

The central bank’s earlier inflation forecast is at 3.7 percent for 2022, just slightly lower than the 2021 print of 3.9 percent.

“The BSP likely will raise its 3.7 percent average inflation forecast for the year as it was based on oil prices averaging at $83 per barrel, well below the current average of around $100,” Pantheon senior Asia economist Miguel Chanco said.

As of February, inflation remained at three percent, but upside pressure is already seen in transport costs, as well as housing, water, electricity, gas, and other fuels.

This as the conflict between Ukraine and Russia continues to escalate, resulting in soaring oil prices in the world market.

“The February forecast already is quite punchy to begin with, and the energy market has calmed down to the extent that the likely pop in transport inflation in the short run should be modest, with disinflation still likely to take hold after,” Chanco said.

He said the threat of inflation would continue to dominate discussions within central banks in Emerging Asia, as none of them could have foreseen the near 40-percent jump in the average price of oil so far this year.

“Remember that the oil price shock is coming on top of lingering pandemic-era chokages in supply chains, which have yet to ease materially, particularly in Southeast, looking at still-lengthening delivery times,” Chanco said.

Further, the think tank said that BSP would leave its main policy rate unchanged at a record low of two percent during its regular policy meeting on March 24.

The BSP has set a high bar for normalization, with both above potential economic growth and a sustained rise in inflation above the target as preconditions.

“We still doubt that the BSP will start to normalize this year as the economy remains far away from closing its COVID output gap,” Chanco said.