According to one expert, the weakening of the Philippine peso combined with the current account deficit will cause increased inflation to be a feature of the economy in fiscal year 2022.
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A weakening peso, widening current account deficit and rising inflation will put pressure on the Philippine central bank to raise interest rates when it meets on Aug. CNBC’s “Street Signs Asia” on Tuesday.
“[With the economy growing] also had double-digit spending on machinery and raw materials, pushing the trade deficit to about $5.7 billion. That will put more pressure on the peso to weaken,” said senior Philippine economist at ING financial firm Nicholas Mapa.
That weakness will further increase inflation ahead of the central bank’s policy meeting, putting pressure on the Bangko Sentral ng Pilipinas to raise interest rates.
Inflation comes in at 6.1%, but Mapa said ING sees it accelerating to 7.2% in the fourth quarter. He explains this is why “central banks [is] the end sounds a bit more hawkish. “
Mapa noted, however, “The Philippine central bank has to wait a long five weeks until we can actually start raising policy rates again.” He said he did not expect an unusual, intermediate rate hike ahead of the central bank’s meeting.
Inflation in the Philippines “mainly continued here because of the second-round effects,” the economist said, noting that wages and transportation costs rose in June.
He predicts that inflation will remain high for the rest of the year, unless oil prices fall and deliver a decline in the second half of the year. The Philippines imports all its crude oil, which has skyrocketed in price in recent months. Mapa also said the crude oil import bill contributed to the widening trade deficit.
The economist also noted that the new government of Ferdinand Marcos Jr has adjusted its growth target to 6.5%, according to him, indicating that Manila’s acceptance of higher inflation will cut growth in the second half. five.
“However, there is a countervailing force in… the economy is reopening, so we could see more capital machinery as well as raw materials as construction activity resumes,” said Mapa.
While the Philippines will see very strong growth in the first half of the fiscal year, with first quarter growth coming in at 8.3%, he predicts higher inflation will likely affect the second half of the year.
“The year 2022 will be a year with two halves … the financial picture will not contribute to good numbers in the second half of the year,” he said.
