MANILA –The domestic rate of price increases is expected to breach the 5-percent level this month as weather disturbances and higher fuel prices continue to push prices of commodities and utilities up.
The inflation rate last August surged to 4.9 percent, the highest since the 4.4 percent in January 2019, due to faster increases in the heavily-weighted food and non-alcoholic beverages index.
“We expect inflation to move past 5 percent as recent and approaching storm systems will undoubtedly figure into this month’s fruit and vegetable inflation numbers. Fish and meat prices will also likely remain elevated at a time that energy costs rise as crude oil has stayed close to USD70/barrel,” ING Bank Manila senior economist Nicholas Mapa said in a report on Monday.
Mapa said utility prices will also contribute to accelerated inflation rate following the announcements by utility firms, as well as retail fuel companies of another round of price hikes.
Inflation slowed to its lowest for the year at 4 percent last July before the big jump in the following month.
The average inflation in the first eight months this year stood at 4.4 percent, above the government’s 2 percent to 4-percent target band until 2023.
Mapa said while the expansion in imports “may be a sign of renewed demand, it also reflects an improvement in domestic production that could help increase the supply of basic goods and services.”
“Despite this, the price pressures appear to be accelerating at the worst possible time with base effects unfavorable in September,” he said, referring to the 2.3-percent inflation rate in September last year.
With these developments, Mapa said monetary authorities will continue to be in a dilemma even after the aggressive rate cuts last year to ensure that economic activities remain robust despite the pandemic.
Last year, the Bangko Sentral ng Pilipinas’ (BSP) policy-making Monetary Board (MB) slashed the central bank’s key policy rates by 200 basis points to record-low 2 percent for the overnight reverse repurchase (RRP) facility to encourage lending activities.
It also cut banks’ reserve requirement ratio (RRR) by as much as 200 basis points and allowed, for a certain period, banks’ lending to micro, small and medium enterprises (MSMEs) as RRR compliance.
However, bank lending has slid and is even in contraction as financial institutions remain wary of borrowers’ ability to pay because of the pandemic.
“Adding an angle of complication is the recent depreciation spell of the peso in the months leading to the eventual Fed taper, which has added fuel to the inflationary fire,” he said.
Mapa said “a rate hike at this point would increase the likelihood that the ongoing economic recession devolves into a full blown economic depression as higher borrowing costs result in an acceleration in NPLs (non-performing loans) while simultaneously snuffing out whatever gains have been made on the lending front.”
He said higher interest rates will discourage small businesses, that are already hard-hit by the recession, from tapping loans which will impact their operations further and may result in more job losses.
“All these developments may take place while Covid-19 (coronavirus disease 2019) rages on as authorities look to experiment with new guidelines in the middle of the Delta surge. All in all, monetary tightening will have no impact on pricier vegetables or the cost of 95 gasoline but it will surely scuttle the recovery momentum,” he added. (PNA)