BSP weighs impact of soaring oil prices on inflation outlook

By Luz Wendy T. Noble, Reporter

THE PHILIPPINE central bank is closely monitoring the impact of the recent rally in global oil prices on domestic inflation, Bangko Sentral ng Pilipinas (BSP) Governor Benjamin E. Diokno said.

“We continue to monitor global crude oil prices to the extent that they affect inflation and growth prospects. Recent surge in oil prices could affect inflation forecasts adversely only if it is persistently high,” Mr. Diokno said in a text message.

Crude oil prices have continued to climb this year, amid resurgent demand and supply disruptions. Brent crude hit a seven-year high of $94 a barrel during Monday’s session, but closed lower at $92.69.

In January, Mr. Diokno said the BSP’s inflation forecast for 2022 and 2023 would hold unless world crude prices settle above $95 a barrel during the period.

The BSP expects inflation to be within target for 2022 and 2023 at 3.4% and 3.2%, respectively.

Mr. Diokno said present oil prices are due to “short supply, higher demand, partly due to global economic rebound as well as severely harsh winter.”

“It’s hard to predict how oil prices would look like this spring or summer. As policy makers, we monitor, assess risks and act accordingly. We continue to gather data and assess various scenarios,” he said.

Mr. Diokno said geopolitical uncertainty arising from the Russia-Ukraine crisis may also affect oil supply and oil price movements.

“First, it could incentivize some countries — for example, US and Saudi Arabia — to increase oil outputs. Second, higher oil prices accompanied by higher interest rates and currency depreciation could result to world recession; in turn, these could result in lower demand for oil,” he said.

In the Philippines, prices of gasoline, diesel, and kerosene have increased by P5.70, P7.95, and P7.20 per liter as of Feb. 1 year to date.

“Oil prices is only one of the variables that affect inflation. Food prices, housing, other utilities contribute more to the consumer price index (CPI) than oil prices,” Mr. Diokno said.

Headline inflation reached 4.5% in 2021, surpassing the 2-4% target range of the central bank and much quicker than the 2.6% in 2020.

In a letter addressed to President Rodrigo R. Duterte explaining why the target was breached, Mr. Diokno said beyond target inflation in 2021 was mainly due to low supply of staple food items and the spike in oil prices.

“The rise of global oil prices will affect supply of goods and services and it will come from the cost of inputs for the production of these said goods and services,” UnionBank of the Philippines, Inc. Chief Economist Ruben Carlo O. Asuncion said in a Viber message.

“The broader reopening of most advanced and emerging economies may even increase the demand for energy to produce and cope up with an also rising demand,” he added.

Mr. Asuncion said inflation is projected to average 3.5% this year, based on preliminary data and in the absence of more details used for the CPI with a 2018 base by the Philippine Statistics Authority. A 4% reading is also “not unthinkable” by the second half of the year if recovery gains traction, he added.

Asian Institute of Management economist John Paolo R. Rivera said some industries, such as transportation and manufacturing, will bear the brunt of higher oil prices.

“Oil prices are huge explanatory factor for inflation as most industries are dependent on oil. Increase in oil prices increase their production cost, which they will pass to consumers,” Mr. Rivera said in a Viber message.

Headline inflation in January slowed to 3% from 3.6% in December. It was the first month that a 2018 base year was used for the CPI.

The Monetary Board will have its first policy review on Feb. 17.

Despite elevated inflation in 2021, the central bank has kept rates untouched for more than a year as it focused on keeping its support for the economy.

The BSP on Tuesday said its quarterly inflation report will be turned into a monetary policy report which will be released a day after the policy reviews in February, May, August, and November.

“The shift to the monetary policy report further strengthens the BSP’s commitment towards greater transparency under the Inflation Targeting framework. The increased disclosure and communication by the BSP of its policy decisions should further help to anchor inflation expectations going forward,” the BSP said.