Philippines: Inflation uptick feared in February as oil prices soar

• Feb 28, 2022

MANILA, Philippines — Economists are expecting an uptick in inflation due to rising global oil prices amid Russia’s invasion of Ukraine.

Ruben Carlo Asuncion, chief economist at Union Bank of the Philippines, said inflation in February would likely accelerate to 3.4 percent after easing to a 15-month low of three percent in January.

Asuncion said Russia’s invasion of Ukraine would cause global oil and natural gas prices to rise, negatively affecting net oil importing emerging markets like the Philippines as this could spill over into more cost-push inflation.

Asuncion said the war could also cause the peso to weaken further to 52 to $1, prompting the Bangko Sentral ng Pilipinas (BSP) to adjust its intervention levels higher to allow the spot rate to absorb some of the external oil price shock.

“A protracted conflict will stall any upbeat growth momentum. Consumer and business sentiment will turn cautious and worry over the broadening of the conflict in Europe,” Asuncion said.

Furthermore, the BSP may intervene and inject liquidity into the spot market and overnight peso markets to calm market fears and prevent any hoarding.

“Amid these oil price shocks, the BSP will keep the policy rate unchanged,” Asuncion said.

Security Bank chief economist Robert Dan Roces said the consumer price index (CPI) likely settled at 3.3 percent in February.

“Looking ahead, inflation risks remain tilted on the upside due to cost-push but also with some demand-driven growth,” he said.

Roces said global agriculture commodity prices continue to go up, with wheat climbing to a nine-year high on worries about potential supply disruptions in the Black Sea region caused by the Russia-Ukraine tensions, while other key crops such as soybeans are also near multiyear highs.

The Philippines remains one of the largest importers of wheat and soybean meal, which are used as both food production inputs and farm animal feed.

“These global price movements may pressure production costs, in turn costs could get passed on to consumers in the near-term. For now, we do expect headline inflation to remain within the target band but persistent price pressures in the months ahead could warrant policy direction guidance from the monetary authorities if inflation becomes too compelling to ignore,” Roces said.

ING Bank Manila senior economist Nicholas Mapa sees February inflation averaging at 3.2 percent amid rising global oil prices and the tightening cycle by the US Federal Reserve.

“BSP’s upward adjustment to inflation suggests that we will test the upper end of the two to four percent inflation band. All the more with oil prices edging higher and the Fed priming to hike rates,” Mapa said.

According to Mapa, the BSP’s two to four percent target could be breached as early as the second quarter as both supply and demand side pressures build.

“On the Ukraine crisis, higher oil prices will drive up local inflation and foment peso weakness as importers will need more foreign exchange to cover pricier oil. Weaker peso foments higher inflation, causing a negative feedback with inflation edging higher and peso weakening further,” Mapa said.

Michael Ricafort, chief economist at Rizal Commercial Banking Corp., also sees inflation picking up to 3.2 percent in February from three percent in January as global oil prices breached the $100 per barrel level for the first time since 2014 due to the Russia-Ukraine conflict.

“However, mathematically, the continued normalization of the inflation base/denominator as seen since the latter part of 2021 could still continue to lead to relatively lower year-on-year inflation at three percent for the coming months, still comfortably below the official inflation target of two to four percent,” Ricafort said.

He said the recent easing of the headline inflation at three percent levels, which is also expected to sustain at three percent levels in the coming months, could still support relatively accommodative monetary policy in terms of keeping the local policy rate at the record low of two percent at the moment.

Source: https://www.philstar.com/business/2022/02/27/2163576/inflation-uptick-feared-february-oil-prices-soar