BSP braces for El Niño impact | Inquirer Business

BSP braces for El Niño impact

/ 02:26 AM December 21, 2023

MANILA  -The El Niño climate phenomenon which poses a grave threat to agricultural output, if it worsens as forecast, is poised to inflict a “very large impact” on food supply in the Philippines. This will push up prices further and influence interest rates, according to Bangko Sentral ng Pilipinas (BSP) Governor Eli Remolona Jr.

Remolona said in a press briefing that, in the eyes of the BSP and the Monetary Board, the ongoing El Niño represents a supply shock.

He said that if the phenomenon strengthens, its impact will be very large and it will affect monetary policy.

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On the other hand, if El Nino’s impact is small, policymakers will tend to look through or not react in terms of raising interest rates.

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“In our analysis, the first quarter might be bad (in relation to supply shocks), and the second quarter is 50-50 (or uncertain),” Remolona said.

Still, because of base effects—prices last year were very high, so the growth of prices this time will be weaker—inflation in the first quarter of 2024 is expected to go below their target of 3 percent and then swing back up in the second quarter.

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Target range

Given a latitude of one percentage point lower or higher, the BSP’s target range of 2 percent to 4 percent represents a pace of growth in prices of goods and services that the BSP thinks will still support economic expansion.

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READ: Philippine rates to stay higher for longer to tame inflation, says BSP chief

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But Remolona reiterated that as far as inflation is concerned—even if the monthly readout has receded in the previous two months toward 4.1 percent in November—“we’re still not out of the woods.”

Dennis Lapid, director of the BSP’s department of economic research, said that the central bank’s projection on inflation used to be based on an assumption of a moderate El Niño event.

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“We’ve now upgraded (the first-quarter outlook) as a strong El Niño episode based on data from Pagasa,” Lapid said. “We included the possibility of the strong episode extending to the second quarter.”

Lapid added that a strong El Niño is expected to add 0.02 percentage point to the inflation readouts.

Thus, Remolona said it was unlikely that the BSP will ratchet down its policy rate in the next few months.

READ: BSP target in sight as Nov inflation slows to 4.1%

This benchmark rate is currently at 6.5 percent. This has been raised from the pandemic-prompted historic low of 2 percent starting in May 2022.

Remolona said the policy rate was on path of staying at a higher level for a longer period than was previously expected.

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“When I say [we are] hawkish, that basically means ‘high for a while,’” he said.

TAGS: El Niño, Food Supply, Inflation

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