Economists keep inflation forecast of 1.8% for 2016

MANILA, Philippines – Economists of private banks kept their inflation forecasts for this year and next year amid the slight uptick in consumer price index over the past few months, a survey conducted by the Bangko Sentral ng Pilipinas (BSP) showed.

Results of the survey of private sector economists for September 2016 showed a steady mean inflation forecast of 1.8 percent for this year and 2.7 percent for next year.

“Analysts attributed their subdued inflation expectations to persistently low global oil prices, sub-par global economic growth, and stable food price conditions. These were seen to outweigh the upside risks brought by a possible rebound in oil prices, strong domestic demand, possible power rate adjustments, a weaker peso, and the impact of La Niña in the latter part of 2016 until the first quarter of 2017,” the central bank said.

The BSP has set an inflation target of two to four percent for 2016 to 2018. Inflation eased to 1.4 percent last year from 4.1 percent in 2014 on the back of stable food prices and cheaper utility rates due to declining oil prices.

Inflation kicked up to an 18-month high of 2.3 percent in September from 1.8 percent in August amid faster rise in food and non-food prices. This brought the average inflation to 1.6 percent in the first nine months.

Last month, the BSP adjusted its inflation forecasts anew to 1.7 percent instead of 1.8 percent due to lower actual August inflation rate as well as the moderation in economic activities in the third quarter due to the impact of the rainy season as well as the moderation of the impact of election spending.

Furthermore, authorities also believed the approval of the power rate adjustment would be delayed.

The central bank sees inflation settling at 2.9 percent next year before easing to 2.6 percent in 2018.

Dennis Lapid, deputy director at the BSP’s Department of Economic Research, said inflation is expected to remain benign over the policy horizon and could settle below the low end of the BSP target range for 2016 and approach the midpoint of the range in 2017 and 2018.

“The risks to future inflation appear to be tilted on the upside,” Lapid said.

He explained slower global economic activity poses the main downside risk while pending petitions for adjustments in electricity rates in the excise tax rate of petroleum products and the corresponding second-round effects on transport fares are the main upside risks to inflation.

Lapid explained the prevailing monetary policy settings remain appropriate.

“Notwithstanding the slightly below-target inflation forecast for 2016, monetary easing does not appear to be warranted at this juncture as supply-side factors, which are largely outside the influence of monetary policy, continue to underpin domestic price movements and benign inflation readings,” he said.

The BSP last tweaked its policy stance in September 2014 when it raised interest rates by 25 basis points.

Last June 3, the BSP implemented an operational adjustment reducing the overnight lending rate (formerly overnight borrowing rate) to 3.5 percent from six percent as well as the overnight reverse repurchase rate (formerly overnight lending rate) to three percent from four percent as part of the shift to the interest rate corridor (IRC) system.