MORE SUBSTANTIAL peso depreciation could force the central bank to make “sizeable” policy adjustments by mid-2022, the Bank of the Philippine Islands (BPI) said.

BPI, in a statement on November inflation data on Tuesday, said food prices that have stayed elevated due to supply disruptions could be vulnerable to a surge in transport costs and typhoons.

Although inflation was mostly driven by supply issues this year, the bank said demand has been contributing to inflation through the exchange rate.

“The peso has weakened by around 5% this year mostly due to imports and improvement in demand. This has created a pass-through effect, amplifying the increase in food and energy costs,” BPI said.

“Substantial peso depreciation due to import expansion and hawkish [US Federal Reserve] policy might force the central bank to make sizeable adjustments in their policy settings in mid-2022.”

A rate hike in the first half is unlikely due to the campaign season leading up to the national elections, it added.

Headline inflation in November eased to 4.2%, the lowest since the 4% posted in July. Still, this exceeded the BSP forecast of 3.3% to 4.1% for the month.

Bangko Sentral ng Pilipinas (BSP) Governor Benjamin E. Diokno last week said the central bank will continue its accommodative monetary policy amid the threat of Omicron variant of the coronavirus disease 2019 (COVID-19). The Monetary Board has kept policy rates at record lows since 2020 to support the economy amid the crisis.

On Tuesday, the peso strengthened after inflation eased, appreciating by 3.5 centavos to close at P50.375 per dollar.

BPI said it continues to expect the peso to weaken against the greenback in the medium term as imports recover after more of the population is vaccinated against COVID-19.

“Dollar demand may pick up and keep the exchange rate above the 50 level. Meanwhile, the possibility of tighter Dollar supply may contribute further to Peso depreciation. The Federal Reserve recently announced how it will unwind its bond purchases, thereby exerting additional pressure on the local currency,” the bank said. — Jenina P. Ibañez