Pandemic fallout to keep Philippine inflation in check, BSP says

MANILA, Philippines – Prices of basic goods and services will likely remain benign over the near term as the local economy continues to struggle with weak demand due to the coronavirus pandemic, the central bank said on Friday.

At the same time, however, Bangko Sentral ng Pilipinas Governor Benjamin Diokno cautioned that the volatile cost of fuel on the international market poses a near term risk for the inflation rate going forward.

The central bank chief made this statement after the government announced the official inflation rate for May of 2.1 percent, which is the downtrend established in recent months.

“The latest inflation number is consistent with the prevailing assessment by BSP that inflation is expected to remain benign over the policy horizon due largely to the adverse impact of the pandemic on the domestic and global economy,” Diokno said.

The May 2020 inflation of 2.1 percent was within the BSP’s forecast range of 1.9-2.7 percent, having dropped from 2.9 percent in January, to 2.6 percent in February, to 2.5 percent in March, to 2.2 percent in April.

“The latest baseline forecasts indicate that inflation is likely to settle below the midpoint of the government’s target range of 2-4 percentage point for 2020 and 2021,” he said.

The central bank chief believes the domestic economy will exhibit a U-shaped recovery path and bounce back to its potential output growth in 2021 once the impact of the government’s fiscal and monetary measures gain traction.

“[But] the volatility of oil prices remains a source of inflation risk,” he warned. “Meanwhile, global rice prices continue to increase owing to lower output among major rice producers in the Asean region amid the ongoing drought in the Mekong Delta.”

Diokno called on other sectors of government to implement “urgent and carefully coordinated measures to ease the adverse effects of the coronavirus pandemic on individuals and firms, with a view toward preventing any long-lasting economic and social damage.”

In response to the ongoing coronavirus pandemic, regulators have so far cut policy rates by 125 basis points and the reserve requirements of financial institutions by 200 basis points.

It has extended banks a set of relief measures meant to be passed on to their borrowers in the form of cheaper loans as well as forbearance for existing credit that may fall into distress due to the weakened economic activity.

The central bank has also extended a P300-billion loan to the national government by buying bonds issued by the Bureau of the Treasury and scooped up other debt instruments from the local debt market.

“In addition to the monetary policy actions that have been deployed so far, the BSP stands ready to use all available measures in its policy toolkit as it continues to assess the impact of the global pandemic on the domestic economy and the Filipino people,” Diokno said.