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BSP wary of inflation impact of oil prices

THE Bangko Sentral ng Pilipinas (BSP) said it is monitoring the markets for any possible second-round effects resulting from rising oil prices, particularly their impact on inflation, though it called such an eventuality unlikely in the near term.

The Monetary Board of the central bank has taken into account the effect of higher oil prices in its latest inflation forecast for the year but will remain vigilant should any monetary response be needed, BSP Governor Benjamin E. Diokno said in a briefing Thursday.

“Rising oil prices as global demand recovers will require more vigilance from monetary authorities. In the Philippines, underlying price pressures remain subdued given the prevailing slack in the domestic economy. However, the BSP remains on the lookout for possible second-round effects,” he said.

While central banks have been anticipating the increase in oil prices as global demand picks up while supply remains tight, Mr. Diokno cautioned that the impact may become “more persistent” and cause second-round effects on oil-importing countries like the Philippines.

Headline inflation was unchanged at 4.5% in April after the rate of increase in food prices slowed.

Any increase in crude prices oil could affect goods and services in the Philippines through transport costs and other energy-related items in the consumer price index (CPI), according to Mr. Diokno.

Tricycles and pedicab fare hikes have been driving inflation recently in the shortage of other transport options during the pandemic.

“(An) example of higher oil prices’ second-round effects could be demand for higher transport costs, which I don’t think is likely to happen (given) the slack in the economy,” Mr. Diokno said.

Transport prices grew 17.6% year on year in April and accounted for 1.4 percentage points of headline inflation that month.

Energy-related CPI, which includes transport fares and fuel products, accounted for 8.3% of the CPI number with all its components more than doubling last month against March levels, after the Dubai crude benchmark hit $62.32 per barrel in April, doubling its year-earlier level.

The economic team projects Dubai crude, a benchmark for oil transported to Asia, to trade between $50-70 per barrel in 2021-2024.

Despite the risk from oil, BSP Monetary Policy Sub-Sector Officer-In-Charge Dennis D. Lapid said near-term inflation is still expected to remain in line with the central bank’s projection of a 3.9% average CPI this year and 3% next year.

“(Based on our) simulations of different levels of world oil prices… even with further increases in oil prices, headline inflation will still decelerate within the target going into next year,” he said.

Mr. Lapid said muted domestic demand could temper possible second-round effects of stronger oil prices.

The central bank aims to keep inflation within 2-4% each year until 2024. — Beatrice M. Laforga

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