Inflation Risks Projected

Moody’s Analytics said Philippine inflation is averaging 5.6% this year, a tad higher than the central bank’s 5.4% forecast. It expects inflation to ease to 2.5% in 2024.

Photo Insert: Moody's expects inflation to ease to 2.5% in 2024.

Even though inflation has started coming down from its 8.7% peak in January, there are still significant headwinds, particularly on food inflation, Cochrane said.

“I was less worried about inflation until Russia’s exit from the Black Sea grain agreement. There could be significant increases in wheat prices. The Philippines doesn’t buy a lot of wheat directly from Ukraine, but with the global price rising, it’ll impact food prices in the Philippines,” he said.

Last week, Russia exited a deal allowing Ukrainian grain exports via the Black Sea, raising fears this could push global grain prices higher and reignite inflation. Prices of global crude oil have also gone up amid tighter supply, Cochrane said.

“We expected some increase, prices are still within a range that will allow for continued growth, but if it goes up much higher if say for example, Saudi Arabia cuts production more or Russia cuts production more, we could see energy prices going back to that position of really giving a push to a renewed inflation,” Cochrane said.

The El Niño weather pattern and the broader issue of climate change may also cause fuel volatility in food prices worldwide. "The experts have indicated that one of the biggest impacts of climate change could very well be a reduction in agricultural output globally and then an increase in prices,” Cochrane said.

“Right now, we’re seeing that impact from the potential impact from India as they are blocking exports of certain grains of rice,” he said.

India last week ordered a halt to its largest rice export category to calm domestic prices, which climbed to multi-year highs in recent weeks as disruptive weather threatened production. India accounts for 40% of world rice exports.

“If that becomes a common theme across the world, of countries trying to protect their own local consumers and put roadblocks in front of exports, tightening trade patterns might make agricultural goods more expensive,” Cochrane said.

He hopes that discussions among countries will help address likely food protectionism and ease any impact from unilateral disruptions of food trade. Risks to the inflation outlook may prompt the Bangko Sentral ng Pilipinas (BSP) and other central banks around the world, to keep interest rates elevated for some time.

“I think that central banks in this part of the world, including the BSP, might be hesitant to begin that easing cycle which we expect sometime probably in this first or second quarter of next year,” Cochrane said.

He noted, too, that the BSP will monitor any possible rebound in inflation while keeping a close eye on the future policy decisions of the US Federal Reserve and the European Central Bank.

“If there is any uptick in food prices, even though these are externally determined and not so much determined by domestic demand, it’s going to put a little bit of a roadblock in front of the central banks in terms of easing monetary policy too quickly. They’re going to want to make sure that at least inflation expectations stay low,” he said.

The Monetary Board has hiked the key interest rate by 425 basis points to 6.25% from May 2022 to March 2023.

BSP Governor Eli M. Remolona had earlier said it is premature to talk about rate cuts, given that inflation is still elevated and global financial conditions may continue to tighten. The BSP will meet on Aug. 17 to discuss policy.

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