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Bangko Sentral ng Pilipinas (BSP), the Philippine’s central bank, has maintained its aggressive rate hike in the past month, hoping to crush soaring high inflation. Though so far it has been to no avail.
The inflation reading in the Southeast Asian nation has accelerated despite the prices of oil and other commodities in the global market cooling. Rising inflation, which has stayed well above the BSP’s target of maximum 6%, forced the bank to raise its policy interest rate by another 50 basis points (bps) to 3.75% in August.
What factors drive the Philippine inflation rate? Will the inflation rate ease in the near and medium term?
In this article, we discuss the Philippine’s monetary policy, inflation rate and the latest Philippine interest rate forecasts from analysts.
What is the Philippine central bank?
Bangko Sentral Ng Pilipinas (BSP) is the central bank of the Philippines. Although the concept of the central bank role in the Philippines dates back to 1933, the Central Bank Act of 1948 was the first to formally establish it.
BSP’s role in the country’s monetary policy had a major overhaul in 1993 when then President Fidel Ramos signed into law the New Central Bank Act on 14 June 1993. The law mandated the maintenance of price stability as BSP’s primary objective.
The monetary board carries out the BSP’s roles and responsibilities, including managing monetary policy and overseeing the financial system. The board is presided over by the BSP governor with five full-time members from the private sector and one from the cabinet.
In January 2002, BSP adopted the inflation targeting framework monetary policy approach in order to achieve its price stability objective. Under the inflation targeting approach, BSP compares actual headline inflation and inflation forecast.
The BSP and the Philippine government jointly set the inflation target through an inter-agency body, The Development Budget Coordination Committee (DBCC). BSP must commit to achieve the inflation target over a given period of time by mainly adjusting its key policy interest rate, the overnight Reverse Repurchase rate (RRP)
For 2022 to 2024, the Development Budget Coordination Committee (DBCC) has approved the inflation target range of 3%, +/- 1 point or between 2% and 4%.
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Philippine interest rate history
According to Philippines interest rate history from economic data provider TradingEconomics, the key interest rate in the Philippines averaged 7.4% from 1985 to 2022. The all-time high of 31% was recorded in January 1985, while a record low of 2% happened in November 2020.
Throughout 2020, BSP cut its overnight reverse repurchase (RRP) six times to support the economy from the adverse impact of Covid-19 pandemic restrictions. The cuts brought interest rates in the Philippines down to 2% in November 2020, from 3.75% in February. BSP held the rate at 2% until March 2022.
The Philippines’ economy was hit particularly hard by the pandemic, as the country imposed one of the world’s longest lockdowns to curb the spread of the virus. Former president Rodrigo Duterte declared a state of calamity on 16 March 2020 for six months nationwide, which was extended until 12 September 2022. The economy contracted by 9.5% in 2020, though by 2021 the contraction had lowered to 5.6%.
BSP started to raise the overnight RRP in May by 25bps to 2.25% on expected rising inflation. At the time, the central bank expected inflation to average 4.6% in 2022, exceeding the upper limit of its 2% to 4% inflation target. For 2023, it forecast inflation to fall to 3.9%.
BPS maintained its hawkish monetary policy up to August, raising the overnight RRP three times. The latest hike on 17 August lifted the RRP to 3.75%, as the inflation rate accelerated.
Sugar spike drives up inflation
Annual Consumer Price Index (CPI) inflation in the Philippines accelerated from 4% in March to 6.4% in July, despite easing global oil prices. It would ease slightly at 6.3% in August. Rising food prices has been one of the main causes of inflation in the Philippines, in particular the recent spike in sugar prices.
Food inflation peaked to 7.1% in July, before retreating to 6.5% in August. Food, beverages and alcohol (FBT) account for half the country's inflation basket, making it vulnerable to volatile farm prices. In recent months, a shortage of sugar after Typhoon Rai – which struck the country towards the end of 2021 – damaged sugar plantations, causing prices to spike.
Sugar is the Philippines’ fifth largest crop by value, according to the US Department of Agriculture. The country consumes most of its sugar production, which was estimated at 2 million tonnes in 2021 to 2022, and exports a small portion to the US.
Prices of sugar, confectionery and desserts registered the fastest annual growth of 26% in August among food groups, according to data from the Philippine Statistics Authority (PSA).
The sugar shortage has been making headlines in the Philippines in the past months, putting pressure on the new government under President Ferdinand Marcos Jr, who took office in June 2022.
The shortage has started to take a toll on beverage producers as well as household consumers. Coca-Cola Beverages Philippines reported to digital publication PhilStar that the sugar shortage has hampered its production lines.
On 18 August, the state-run Philippine News Agency reported that the country’s Department of Agriculture had drafted a proposal to import 150,000 tonnes of sugar to respond to fears of a shortage from the country’s beverage industry.
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Rising inflation slows economy
The Philippine’ gross domestic product (GDP) grew by 7.4% in Q2 2022, slower than 8.2% in Q1 and 12.1% in Q2 2021 as inflationary pressure started to bite growth.
Household expenditure, which accounted for 68.2% of GDP in Q2 2022, expanded by 8.6%, decelerating from 10% in the previous quarter, according to BSP’s August monetary policy report.
ANZ Research economists Debalika Sarkar and Raymond Yeung believe inflation poses a downside risk for the Philippines’ economic growth, noting:
“Inflation risks remain, as producers pass higher costs on to consumers. In fact, the momentum in private consumption will be hard to sustain in the second half of 2022, as the rising cost of living will compel households to rethink spending decisions.”
The Philippines’ Government has aimed for 7% to 9% GDP growth in 2022 and 6% to 7% in 2023-2024.
ING Group expected the country’s economic growth to slow to 4.5% in 2023, from a forecast of 6.1% in 2022, and to rebound to 5% in 2024.
BofA has maintained its forecast for the Philippines’ GDP growth at 6.5% for 2022 and 5.5% for 2023:
“In 2023, our growth estimates are more subdued until the inflation-interest rate challenges subside. We also await the government's 2023 spending plan and what role can the private sector play, if any, in sustaining the infrastructure build-up.”
Inflation to stay high in near-term
In August, BSP estimated the Philippines inflation rate could peak in the July to September quarter and remain above the target range of 2% to 4% until the second quarter of 2023. The central bank named several reasons for the increased inflation, including high global oil prices and the recent surge in sugar prices.
The bank expected the Philippines inflation rate could ease and drop within the target range by the third quarter of 2023.
ANZ Research economists Debalika Sarkar and Sanjay Mathur said of the economic situation on 18 August:
“These developments are likely to outweigh the impact of the easing in oil prices and slowing global and domestic growth.”
BPS revised up the Philippines inflation rate for 2022 to 5.4% from the previous estimate of 5% in June. It forecast annual inflation to average 4% in 2023, dropping further to 3.2% in 2024.
Certain banks have also projected inflation rate in the Philippines to slow in the longer term. ING Group forecast the country’s inflation rate to drop to 4.4% in 2023 and to 3.9% in 2024, from 5.5% in 2022.
Bank of America (BofA) expected the Philippines inflation rate in 2022 to average 5.4%, easing to 3.9% in 2023.
Philippine interest rate outlook for 2022 and beyond
As the Philippine inflation rate is set to remain high at least until the end of this year, which could take a toll on the country’s economic growth, what are the Philippines interest rate forecasts for 2022 and beyond?
In its Philippine interest rate forecast, ANZ Research, expected a 25bp hike in each policy meeting until February 2023. The BSP’s Monetary Board is set to have three more meetings this year on 22 September, 17 November and 15 December, according to its schedule.
“The past two rate hikes highlight the BSP’s aggressive efforts to tackle inflation and peso weakness and contrast with its initial preference for a gradual normalization of monetary policy,” said ANZ Research’s Sarkar and Mathur.
“We expect the central bank to continue hiking at least until early Q1 2023, with the magnitude of hikes contingent on the evolving external landscape and inflation trajectory. In our assessment, the recent easing of oil prices can alleviate the trade deficit but a meaningful reduction will require a broader correction in import prices.”
ING projected BSP to hike the policy rate to 4.5% in the fourth quarter of 2022 and to 4.75% in the first quarter of 2023. The country’s central bank was expected to hold the rate at 4.75% in the second quarter and lift it to 5% in the third quarter of 2023.
The policy rate was predicted to be maintained at 5% level until the first quarter of 2024, before it would be lowered to 4.5% in the fourth quarter of 2024.
On 9 August, BofA forecast the country’s policy rate may stand at 3.75% at the end of 2022 and 4% in 2023.
The Bottom line
Analysts were of the view that the country's central bank would continue its hawkish rate hike at least until the first quarter of 2023 to counter soaring inflation.
Remember that analysts' predictions can be wrong. You should always conduct your own research before trading, looking at the latest news, technical and fundamental analysis and a wide range of analyst commentary. Past performance does not guarantee future returns. And never trade money that you cannot afford to lose.
FAQs
What is driving the inflation rate in the Philippines?
Rising food inflation is the main driver of inflation rate in the Philippines this year due to the recent spike in sugar prices.
When was the highest inflation rate in the Philippines
According to Trading Economics, the highest interest rate in the Philippines was 31% in January 1985.
How often does inflation occur?
Inflation can occur at any time. It can happen when prices for goods and services increase due to increased costs of production.
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FAQs
What are the causes of inflation in the Philippines? ›
Rising food prices has been one of the main causes of inflation in the Philippines, in particular the recent spike in sugar prices. Food inflation peaked to 7.1% in July, before retreating to 6.5% in August.
What is the main cause of inflation in the Philippines 2022? ›The acceleration of inflation in AONCR in September 2022 was primarily due to the higher annual growths in the indices of food and non-alcoholic beverages at 7.2 percent; housing, water, electricity, gas and other fuels at 8.0 percent; and restaurants and accommodation services at 4.2 percent.
What can you say about the inflation rate in the Philippines? ›For 2021, an inflation rate of 3.9% was calculated. During the observation period from 1960 to 2021, the average inflation rate was 8.5% per year. Overall, the price increase was 12,625.67%. An item that cost 100 pesos in 1960 costs 12,725.67 pesos at the beginning of 2022.
Does Philippines have high inflation rate? ›Philippines: Inflation comes in at highest level since December 2008 in October. Inflation rose to 7.7% in October, following September's 6.9%. October's figure represented the highest inflation rate since December 2008.
What are the causes of inflation rate? ›The main causes of inflation can be grouped into three broad categories: demand-pull, cost-push, and. inflation expectations.
What is inflation and what causes it essay? ›Inflation is mainly caused by excess demand/or decline in aggregate supply or output. Former leads to a rightward shift of aggregate demand curve while the latter causes aggregate supply curve to shift leftward. Former is called demand-pull inflation (DPI) and the latter is called cost- push inflation (CPI).
Who is responsible for inflation in Philippines? ›The National Government, through the DBCC, sets the inflation target based on the Consumer Price Index (CPI) two years ahead in consultation with the BSP. The BSP has full powers and responsibility over the announcement of the inflation target and the determination of appropriate monetary policy to achieve the target.
How does the inflation rate affect the lives of every Filipino? ›Increased Costs of Goods and Services
Inflation thoroughly affects the prices of goods and properties. Both owned and rented real estates would demand higher repayments. Landlords would increase rent and property owners would also suffer from climbing real estate taxes (amilyar).
In an inflationary environment, unevenly rising prices inevitably reduce the purchasing power of some consumers, and this erosion of real income is the single biggest cost of inflation. Inflation can also distort purchasing power over time for recipients and payers of fixed interest rates.
What is inflation Explain with your own words? ›Broad increase in prices
In a market economy, prices for goods and services can always change. Some prices rise; some prices fall. Inflation occurs when there is a broad increase in the prices of goods and services, not just of individual items; it means, you can buy less for €1 today than you could yesterday.
How do you explain the rapid increase in the inflation rate here in the Philippines? ›
The recent Philippine inflationary experience comes from the combination of domestic economic factors and the effects of external economic and political conditions that have happened in succession.
What do you think are the solutions to inflation problem? ›Tax increases can reduce demand in a distributionally desirable way, putting downward pressure on inflation. Lawmakers can further reduce inflation by limiting tax expenditures and subsidies that drive up specific prices in the economy.
How does inflation affect people's lives? ›Increases in inflation do increase the overall cost of living and if wages are not increasing to match the increase in the cost of goods and services, the value of a consumer's dollar will decrease.
What is inflation explain its causes and effects? ›Inflation is mainly caused by excess demand/ or decline in aggregate supply or output. Former leads to a rightward shift of the aggregate demand curve while the latter causes aggregate supply curve to shift leftward. Former is called demand-pull inflation (DPI), and the latter is called cost-push inflation (CPI).
What are the main causes of inflation in developing countries? ›Government spending, money supply growth, world oil prices, and the nominal effective exchange rate are the main causes of inflation in developing countries.
What is the cause of inflation 2022? ›Supply chain crisis
Some economists attribute the US inflation surge to product shortages resulting from the global supply-chain problems, itself largely caused by the COVID-19 pandemic. This coincided with strong consumer demand, driven by low unemployment and improved financial conditions following the pandemic.
Take advantage of Sales, Discounts, and Promotions. This inflation-fighting strategy in the Philippines may seem obvious, but it offers a number of advantages. Take advantage of the 5.5, 7.7, or 11.11 bargains of online merchants like Lazada and Shopee.
Is inflation an economic problem? ›Inflation affects all aspects of the economy, from consumer spending, business investment and employment rates to government programs, tax policies, and interest rates. Understanding inflation is crucial to investing because inflation can reduce the value of investment returns.
Why does inflation cause problems in a society? ›Erodes Purchasing Power
An overall rise in prices over time reduces the purchasing power of consumers, since a fixed amount of money will afford progressively less consumption. Consumers lose purchasing power whether inflation is running at 2% or at 4%; they just lose it twice as fast at the higher rate.
For people in lower-income households who already live hand-to-mouth, paying more for essential goods like gas and food can be devastating. Inflation also lowers the real minimum-wage around the world, meaning it decreases the value of minimum wage and lowers the standard of living even more for those who rely on it.
Why is it important to control inflation? ›
It provides for wealth accumulation, debt reduction and better standards of living for many individuals and can act as a stimulus for the overall economy. But too much inflation can make it difficult for small businesses to stay on track, particularly if they are unable to pass those cost increases onto consumers.
How does inflation affect the future? ›Assets with fixed, long-term cash flows tend to perform poorly when inflation is rising, since the purchasing power of those future cash flows falls over time. Conversely, commodities and assets with adjustable cash flows (e.g., property rental income) tend to perform better with rising inflation.
How do you explain inflation to students? ›Inflation is the increase in the prices of goods and services over time. Well, how does that affect us? Because of inflation the value of the dollar, also called its purchasing power, reduces every year. So, $100 five years from now cannot buy the same amount of stuff it can buy today.
Is inflation good or bad? ›While high inflation can be harmful, too little inflation can also weaken the economy. When the economy is struggling and inflation is too low, the Fed will take the opposite approach by lowering interest rates or buying assets to increase cash circulation.
Does the government cause inflation? ›An increase in government spending is one of the factors that economists say can drive inflation. Other factors include interest rates, monetary policy, supply chain disruptions and fluctuations in demand for goods and services. Inflation can be an important consideration for investing, saving and borrowing.
What is the root cause of inflation 2022? ›Supply chain crisis
Some economists attribute the US inflation surge to product shortages resulting from the global supply-chain problems, itself largely caused by the COVID-19 pandemic. This coincided with strong consumer demand, driven by low unemployment and improved financial conditions following the pandemic.
Inflation is on the rise across global economies. Global inflation is forecast to rise to 8.8% in 2022 from 4.7% in 2021 but decline to 6.5% in 2023 and to 4.1% by 2024, according to the International Monetary Fund.
How much is the inflation rate in the Philippines 2022? ›FocusEconomics Consensus Forecast panelists expect inflation to average 4.9% in 2022, which is up 0.3 percentage points from last month's forecast, and 3.9% in 2023.
What is the inflation increase for 2022? ›The annual inflation rate for the United States is 7.7% for the 12 months ended October 2022 after rising 8.2% previously, according to U.S. Labor Department data published Nov. 10. The next inflation update is scheduled for release on Dec. 13 at 8:30 a.m. ET.
How do we prevent inflation? ›One of the main tools The Fed uses to fix inflation is raising interest rates. This is an example of monetary policy. The government can introduce fiscal policies to reduce inflation by increasing taxes or cutting spending.
How do we control inflation? ›
One significant monetary way to curb Inflation is to control the money supply in the economy. If the money supply goes down, the demand for goods will reduce, causing a price fall. Another way to curb the money supply is when the government withdraws specific paper notes or coins from circulation.
How has inflation affected the cost of living? ›Increases in inflation do increase the overall cost of living and if wages are not increasing to match the increase in the cost of goods and services, the value of a consumer's dollar will decrease.
Who benefits from inflation? ›2. Equity and Commodity Investors. Despite low economic growth rates, investors can benefit from inflation if they hold the correct stocks and commodities in their portfolios. Equity investors: Putting your money in stocks is much better than holding cash during times of high inflation.
What is inflation rate meaning? ›Broad increase in prices
Some prices rise; some prices fall. Inflation occurs when there is a broad increase in the prices of goods and services, not just of individual items; it means, you can buy less for €1 today than you could yesterday. In other words, inflation reduces the value of the currency over time.
In September 2022, prices had increased by 8.2 percent compared to September 2021 according to the 12-month percentage of change in the consumer price index, respectively the monthly inflation rate for goods and services in the United States.
What is the real rate of inflation? ›Since the Bureau of Labor Statistics began calculating CPI-E in 1982 through 2021, it averaged 2.96%—a touch higher than CPI-U, which inflated about 2.77% per year, on average, over that same stretch.