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Elevated inflation threatens

to slow PH recovery, says
Amro
Philippine Daily Inquirer / 05:26 AM September 25, 2021

Elevated inflation could slow the economic rebound in countries like the
Philippines as household consumption would take a hit from high prices,
the regional surveillance organization Asean+3 Macroeconomic Research
Office (Amro) said on Friday.

Amro said in the report “Price Wars: The Return of Asean+3 Inflation?”
that “there is a nonnegligible risk that global and regional inflation could
remain elevated for a prolonged period” as a result of the gradual
recovery from the COVID-19 pandemic.
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Amro sees two high-inflation scenarios in the region: an optimistic one

where elevated consumer prices are caused by resurging demand and
economic recovery; and a pessimistic scenario, which poses a threat to
laggards in containing COVID-19, like the Philippines.

“If the supply-side squeeze does not subside, particularly as more

infectious and virulent COVID-19 variants prevent economies from
reopening, inflationary pressures will eventually be passed on to
consumers, stifling demand and raising the specter of stagflation. If the
growth momentum in countries such as Japan, Malaysia, the Philippines,
and Thailand continues to lag the pick-up in inflation, their economic
recovery could be at risk,” Amro said.

Upward bias
“With prices expected to remain on an upward bias in the near-term, any
premature monetary policy tightening—either to ease inflationary
pressures or in response to global interest rate hikes—risks disrupting the
recovery of consumer spending and private investment. Further fiscal
expansion to support growth would also be difficult as higher interest
rates would increase government debt burden,” it added.

While the Bangko Sentral ng Pilipinas (BSP) kept the policy rate at a
record-low 2 percent on Thursday, monetary authorities jacked up
inflation projections for the near term.

The BSP now expects the rate of increase in prices of basic commodities
to average 4.4 percent this year from 4.1 percent previously, above its 2-4
percent target range. Headline inflation was seen averaging 3.3 percent
next year and 3.2 percent in 2023, up from previous estimates of 3.1
percent for both years.

Despite the foreseen high inflation environment, economists expect the

BSP to keep key rates steady up to next year.

“With headline inflation slowly returning to the BSP’s inflation target

band on our forecasts and slow vaccination progress likely to weigh on
activity through year-end, we expect the BSP to keep the policy stance
accommodative for the rest of the year, and be patient in normalizing
policy, keeping the policy rate on hold until late 2022,” Goldman Sachs
Economics Research said in a Sept. 23 report.

Demand pressure
“The lack of demand pressure should allow for the BSP to avoid hiking
rates, which would be a clearly unwelcomed development for an
economy that is likely to find itself more than 5-percent below the
prepandemic level by the end of 2021. A low vaccination rate by regional
standards will likely prevent a full reopening anytime soon, and private
investment is unlikely to pick up sharply before the May 2022 election,”
HSBC chief Asean economist Joseph Incalcaterra said in a separate report.

Pantheon Macroeconomics senior Asia economist Miguel Chanco warned

that the inflation rate—which averaged an above-target 4.4 percent as of
end-August—had yet to peak.
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“The [BSP’s] expectation that inflation will return to within the target
band this November is a pipe dream. We continue to expect the headline
rate to accelerate and peak at over 6 percent that month. The Philippines
should continue to feel the lagged impact of the sharp acceleration in
global food inflation in the first half of this year, as well as the delayed
pass-through of the recovery in global energy prices to domestic utility
costs,” Chanco said.

For Singapore-based United Overseas Bank, since the Philippines’ real

interest rates were “expected to remain negative across 2022 to 2023 and
global central banks are anticipated to further normalize their monetary
policy in the near term, we believe that the next move for the BSP will be
a rate hike.”

“For now, we project a 25-basis point (bp) rate hike in the second half of
2022 on expectations that the Philippines would have safely entered an
endemic phase with a smooth presidential transition and broad policy
continuity next year,” UOB said.
—Ben O. de Vera