July inflation seen as high as 5.8%

Price increases for basic goods and services were expected to have risen at a faster pace for the month of July due to higher electricity and water rates as well as petroleum prices, economists of the Bangko Sentral ng Pilipinas said on Tuesday.

In a statement, the central bank’s Department of Economic Research predicted that inflation rate for last month rose between 5.1 and 5.8 percent. This represents a higher range than its June forecast of 4.3-5.1 percent, with the official number for the month surprising observers at 5.2 percent—the highest for at least five years.

Upward price pressures

“The increases in electricity rates in Meralco-serviced areas, water rate adjustments in Maynilad- and Manila Water-serviced areas, domestic gasoline and liquefied petroleum gas prices, jeepney fares, scheduled increase of the tobacco excise tax, and prices of rice and other agricultural commodities could lead to upward price pressures during the month,” the central bank’s economists said.

Meanwhile, they also noted a “slight downward adjustment in domestic diesel prices for July”.

“Going forward, the BSP will continue to keep a watchful eye on the risks to the inflation outlook and will take necessary action to help ensure that inflation expectations remain firmly anchored to the target,” the central bank economists added.

Stubborn domestic prices

The government is set to announce the latest official inflation rate on Tuesday next week, while the central bank’s policy-making Monetary Board is set to meet on Aug. 9 to discuss what BSP Governor Nestor Espenilla Jr. promised would be a “strong” response to stubbornly high domestic prices.

After insisting that the inflation rate was driven by supply side factors that do not respond to monetary policy tightening —and claiming that prices would stabilize by 2019 without the need for central bank intervention—the BSP finally decided to raise interest rates in two successive 25-basis point adjustments in May and June.

Driven by demand

In deciding to belatedly tighten monetary policy, the central bank said it had now seen evidence of inflation being driven by “demand side” pressure, which required higher interest rates to quell.

Upon the prodding of the International Monetary Fund, Espenilla also announced a temporary halt to his policy of reducing banks’ statutory reserve requirements after two 100-basis point reductions this year, saying the drive to reduce bank reserves to single-digit levels from their current 18-percent rate would resume once inflationary pressures are contained next year.