2023 inflation forecasts hiked

After above-target January print

MANILA, Philippines —  Economists raised their Philippine inflation forecasts this year after the price index blew past expectations to hit a fresh 14-year high of 8.7 percent in January.

Aris Dacanay, economist for ASEAN at British banking giant HSBC, said he sees inflation averaging 5.7 percent this year, higher than their original outlook of five percent.

He said as a result of the above-target inflation print in January, the Bangko Sentral ng Pilipinas (BSP) is now expected to deliver a higher rate hike on Feb. 16.

He said the Monetary Board, the BSP’s policy-setting body, is now likely to hike its key policy rates next Thursday by more than the 25-basis- point increase delivered by the US Federal Reserve last week.

“We raise our policy rate forecast and, at the same time, expect BSP to maintain its aggressive rate hiking position a little longer – delivering a 50 bp (previously 25 bp) hike at next week’s rate setting meeting. This would bring the overnight reverse repurchase rate to six percent,” he said.

UK-based think tank Pantheon Macroeconomics likewise raised its inflation forecast for the Philippines, estimating it to average at 5.4 percent this year.

“We have upgraded our 2023 average inflation forecast to 5.4 percent, in the wake of January’s hotter-than-expected reading,” Miguel Chanco, chief emerging Asia economist at Pantheon Macroeconomics, said in a report.

Earlier, he said Pantheon Macroeconomics’ average inflation forecast for the Philippines this year is at 3.8 percent.

The Monetary Board raised key policy rates by 350 basis points last year, bringing the benchmark rate to a 14-year high of 5.50 percent from an all-time low of two percent, as inflation accelerated to 5.8 percent and breached the BSP’s two to four percent target range from 3.9 percent in 2021.

According to Dacanay, the January consumer price index (CPI) number were eye-watering, as economic managers and economists had expected inflation to ease in January after peaking in December.

“However, the year started badly… The big upside surprise in January has set the tone for the inflation outlook for the rest of the year,” he said.

With the Philippines facing an inflation problem of its own, the HSBC economist now expects the Monetary Board to raise interest rates by another 100 basis points, instead of 75 basis points, this year to tame inflation.

“After doing more than the Fed with a punchy 50 bp hike next week, we expect the BSP to continue delivering rate hikes at its upcoming Monetary Board meetings, albeit more modest ones. We expect the BSP to increase rates by 25 bp to 6.25 percent in March, and hike rates again by another 25 bp to 6.50 percent in May before pausing for the rest of the year,” Dacanay said.

With the stronger-than-expected Philippine economic growth, he said monetary authorities now have room to lift rates further this year.

“Doing so will help promote domestic and external balance, which needs some nudging from the BSP by incentivizing savings through higher rates,” Dacanay said.

He said the BSP is now expected to keep a tight monetary stance for a prolonged period of time before slashing interest rates by the second half of 2025 with a 50-basis point cut to bring the overnight reverse repurchase rate to six percent, above the original forecast of 5.75 percent.

Chanco, for his part, said the January inflation print guarantees a 25-bp rate hike to bring the overnight reverse repurchase rate to 5.75 percent when the BSP holds its policy meeting next Thursday.

While Pantheon Macroeconomics has hiked its inflation forecast, Chanco said they still expect disinflation to be just around the corner.

He said a 50-bp worth of interest rate cuts is also likely in the fourth quarter.

“Our revised inflation forecast sees the headline rate returning to the BSP’s two to four percent target range in the third quarter, led by a moderation in non-core price pressures. This should lead to a simultaneous reversal in core inflation, as the Philippines’ core measure includes a number of energy and food-related items,” he said.

While the contribution from housing, utilities and transport inflation to the headline rate is likely to fall by the third quarter, he said food inflation, however, poses a bigger question.

He said the country is just one of the few emerging markets still suffering from intensifying inflation pressures due to domestic factors which include agricultural output.

“We reckon it’s only a matter of time before import barriers in farming are relaxed more widely, despite political constraints,” he said.