Bangko Sentral ng Pilipinas (BSP) Governor Benjamin E. Diokno said Thursday that the inflation rate will reach its peak in the second quarter months of April to June and that so far, there is limited evidence of second-round effects.

A vegetable seller tends to a client at Paco Market. (ALI VICOY / MANILA BULLETIN FILE PHOTO)
A vegetable seller tends to a client at Paco Market. A vegetable seller tends to a client at Paco Market. A vegetable seller tends to a client at Paco Market. A vegetable seller tends to a client at Paco Market. (ALI VICOY / MANILA BULLETIN FILE PHOTO)

“With the ongoing health crisis, demand-side price pressures are mostly subdued,” said Diokno. “These are tempered, in large part, by moderately high unemployment, spare manufacturing capacity and subdued activity in lending and investments.”

Based on the BSP’s latest inflation outlook assessment, inflation is projected to rise above the high-end of the two-four percent target in the first half of 2021 with the peak expected in the second quarter due to the transitory impact of supply-side price pressures as well as positive base effects, according to Diokno.

He reiterated that inflation is still expected to decelerate below the mid-point of the two-four percent target range by the fourth quarter of this year and in the first quarter 2022 due to negative base effects, before settling closely to the mid-point by the second half of 2022.

For this year, the BSP forecasts an inflation average of four percent and 2.7 percent for 2022. During Thursday’s regular BSP virtual press briefing, Diokno cited its latest survey of private sector economists (January 2021) which indicated that analysts forecast a higher mean inflation for 2021 of 3.4 percent from three percent back in December 2020. The forecasts for 2022 and 2023 has stayed fixed at three percent with economists looking at both cost-push and demand-pull inflation as drivers of inflation.

“Given this outlook, the BSP will carefully assess the evolving price developments that impact the inflation outlook along with evidence of possible second-round effects at the upcoming monetary policy meeting on March 25,” said Diokno. Generally, central banks tolerate or accommodate first-round effects or supply-side pressures to inflation such as price upticks in oil, rice, fish, meat and vegetables, but will respond to second-round effects to minimize the impact on inflation expectations. Samples of second-round effects are wage and transport fare increases.

“Notwithstanding the impact of supply-side factors on the inflation path, we are not inclined to tighten monetary policy at this juncture,” said Diokno. He also continue to say that the rising inflation is still largely because of transitory factors and “reflecting mainly the impact of base effects, weather-related disturbances and the ASF (African Swine Fever) outbreak on a narrow range of food items, as well as higher global oil prices.” The impact of supply shocks on inflation is however significant since food and energy account for 38.4 percent of the consumer basket.

Diokno said the BSP still believes that monetary policy settings “remain appropriate to support domestic activity (and) given that the recent uptrend in inflation continues to originate from supply-side factors, monetary authorities will remain vigilant against the emergence of second-round effects.”

In the meantime, the BSP chief said core inflation is stable despite the pandemic and that demand-side price pressures remain mostly subdued amid unemployment and lack of sufficient business activity. “The challenge for monetary authorities is in finding the right balance between seeking to reduce inflation and avoiding the further weakening of the real sector. We will continue to evaluate in the coming months if adjustments in the policy stance will be warranted, keeping in mind the continuing need for sustained policy support to facilitate the strong recovery of the economy,” said Diokno.


Source: Manila Bulletin (https://mb.com.ph/2021/03/12/inflation-will-peak-in-2q-diokno/?utm_source=rss&utm_medium=rss&utm_campaign=inflation-will-peak-in-2q-diokno)