COVID-19 impact: Monetary Board says weak demand likely to keep inflation low until 2022 | Inquirer Business

COVID-19 impact: Monetary Board says weak demand likely to keep inflation low until 2022

By: - Reporter / @daxinq
/ 05:09 PM September 17, 2020

MANILA, Philippines—The pace of price increases of basic goods and services will likely remain muted in the next two years, due to the fallout of the ongoing COVID-19 pandemic which has dampened consumer demand substantially, according to the central bank’s highest policy-making body.

According to minutes of the latest Monetary Board meeting, the Bangko Sentral ng Pilipinas’ (BSP) top brass expect a “benign inflation environment over the policy horizon” with the consumer price index expected to average 2.6 percent in 2020, 3 percent in 2021 and 3.1 percent in 2022.


These forecasts have already been adjusted upward marginally due primarily to the higher-than-expected inflation figures for June and July and the continued increase in global crude oil prices. But these were partly offset by the sharper contraction in domestic economic growth and continued appreciation of the peso.

“The overall balance of risks to the inflation outlook remains tilted to the downside for 2021 to 2022,” according to the Monetary Board, which noted that adjustments in power and water rates are the main upside risks to domestic prices.


“The potential impact of a more disruptive COVID-19 pandemic on global and domestic economic growth is seen as the primary downside risk factor to inflation over the policy horizon,” the group said.

At its latest interest rate making setting meeting last month, the Monetary Board kept the central bank’s overnight borrowing rate — which the financial system uses as a guide for pricing loans — unchanged, after a series of rate cuts totalling 175 basis points over the course of the pandemic.

BSP Governor Benjamin Diokno said the pause was meant to allow the Philippine economy to fully digest the estimated P1.3 trillion in liquidity that regulators have so far released into the financial system to buttress growth.

In its discussions last month, the Monetary Board said domestic economic activity is projected to contract at a slower pace in the remaining quarters of 2020 before recovering in 2021 and 2022.

The board said “the economy could contract further in the third quarter of 2020.” It said the decline in gross domestic product (GDP) in the third quarter of 2020 “could be driven primarily by the further deterioration in the performance of both the industry and services sector, which remain heavily affected despite some easing in quarantine measures.”

Forward-looking indicators for manufacturing production suggested that momentum remained disrupted.

Notwithstanding a further improvement from the June purchasing managers’ index (PMI) of 43.5, the preliminary composite PMI in July 2020 continued to settle below the 50-point expansion threshold of 45.


“The slower contraction of manufacturing and services more than offset the marginal decline of the retail and wholesale sector,” the board said, explaining that the manufacturing sector’s better performance was due to the gradual easing of lockdown measures and travel restrictions, which allowed more firms to reopen and operate during the month.

“At the same time, limited improvements in mobility indicators suggest that the public is opting to stay at home, which could affect retail sales and spending for other non-essentials, the same factors that pulled down consumption growth in the previous quarter,” it added.

Edited by TSB
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TAGS: #COVID19PH, BSP, Contraction, coronavirus Philippines, demand, economy, GDP, Inflation, monetary board, pandemic
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