Inflation a challenge until H1 2023, economist

Here’s the bad news: Inflation is forecasted to peak near seven percent in October. The good news is that prices will start to cool down in 2023.

“We are still yet to see the peak in inflation near 7.0 percent in October should global price pressures from oil, energy and food remain substantial,” Jun Neri, lead economist at Bank of the Philippine Islands, said.

“In this scenario, average inflation is expected to settle between five percent and 5.5 percent. Given this, the Bangko Sentral ng Pilipinas may hike again by at least 25 basis points in its November policy meeting,” the economist said.

The latest inflation print came in at 6.4 percent for July, the highest since October 2018, mainly driven by food and transportation costs.

“We may not have seen the peak of inflation just yet, as the Trade department recently approved price increases of 3.29 percent to 10 percent for necessities and prime commodities,” Neri said.

On Thursday, the central bank’s Monetary Board raised the interest rate on the BSP’s overnight reverse repurchase facility by 50 bps to 3.75 percent, BSP Governor Felipe Medalla said.

“The interest rates on the overnight deposit and lending facilities were raised to 3.25 percent and 4.25 percent, respectively,” Medalla added.

The governor also said that the BSP’s latest baseline forecasts have shifted higher for 2022, with average inflation projected to breach the upper end of the 2 percent to 4 percent target range at 5.4 percent.

External pressures
Though global oil prices have fallen below $90 per barrel, coal prices are nearing $430 per metric ton, almost at par with the high of $440/MT seen during the height of the Russian invasion of Ukraine, he added.

Meanwhile, Russian President Vladimir Putin continues to trim natural gas supplies to Western Europe in retaliation for sanctions, pushing up coal prices as an alternative energy source with winter fast approaching.

This may elevate Philippine electricity prices since coal provides about 57 percent of the country’s power generation mix.

Although the United States headline inflation cooled slightly in July to 8.5 percent from 9.1 percent in June, FED chair Jerome Powell will likely continue hiking aggressively in the coming months.
The expected year-end level for the Fed Funds Rate remains at 3.75 percent to 4.00 percent.

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