Elevated inflation threatens to slow PH recovery, says Amro

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.

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.

“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