Inflation may breach 4 percent this year if oil prices continue to climb amid the uncertainty brought about by Russia’s war in Ukraine, the Bank of the Philippine Islands (BPI) said over the weekend.
In a report, BPI said although it kept its 2022 inflation forecast of 3.8 percent, the rate could shoot beyond 4 percent if upward pressure on oil prices doesn’t ease soon.
“We continue to expect favorable base effects particularly in food to keep the headline print muted through March.
However, upside risks to inflation have built up due to recent global price developments and this could spill over to foodproducts eventually. Global oil prices have breached the $100 [per barrel] threshold amid the conflict in Ukraine,” it said.
It said major global oil producers have not expressed any intention to ramp up their production despite the pressure from the West.
“A prolonged period of elevated oil prices could push inflation close to the target of the BSP,” BPI said, referring to the Bangko Sentral ng Pilipinas.
On Friday, the Philippine Statistics Authority reported that inflation remained at 3 percent in February 2022, the same rate a month ago, as slowdowns in prices were seen in food, beverages and tobacco indices.
The February inflation was slower compared to the 4.2 percent a year ago. This brought inflation in the first two months to 3 percent, the midpoint of the target range of 2-4 percent.
BSP Governor Benjamin Diokno said the February 2022 inflation of 3 percent was within the BSP’s forecast range of 2.8 to 3.6 percent for the month.
Diokno said inflation was seen to accelerate over the near term due to higher oil prices as well as the impact of positive base effects. Nonetheless, the BSP’s full-year inflation forecasts continue to show that inflation would average within the 2-4 percent target range for 2022-2023 as government direct measures help address the supply constraints.
“However, the recent uptick in global crude oil prices due to geopolitical tensions have raised global and domestic macroeconomic uncertainty over the near term,” he said.
Meanwhile, BPI continues to expect a 75-basis-point adjustment in the policy rate this year from a record-low of 2 percent to 2.75 percent.
BPI said aside from inflation risks, the US Federal Reserve was another factor that could push the BSP to hike rates.
It said if the BSP decides to keep its policy rate at 2 percent for most of the year, the declining spread between US and local rates could exacerbate the depreciation of the peso.
“The BSP may need to sell dollars more aggressively in order to prevent the peso from depreciating to a level that hurts growth and drives inflation,” it said.
The peso last Friday lost 24 centavos against the US dollar to close at 51.74 from 51.5 a day ago. It was its weakest level in more than two years or since Oct. 9, 2019 when it closed 51.79.
Earlier, the BSP projected inflation to settle within the target range of 2-4 percent this year.