March inflation likely slower, still above 8%

MANILA, Philippines — Most economists expect inflation to ease for the second consecutive month in March, but are convinced it remained above eight percent or double the higher end of the two to four percent target range of the Bangko Sentral ng Pilipinas (BSP)

UnionBank chief economist Ruben Carlo Asuncion said inflation eased further to 8.2 percent in March after a slight dip to 8.6 percent in February from a 14-year high of 8.7 percent in January.

“Nevertheless, from our recent regression runs, we do not expect a rapid disinflation for this year,” Asuncion said.

The Aboitiz-led bank sees inflation accelerating further to average 7.1 percent this year from 5.8 percent in 2022.

Asuncion explained that the biggest easing in March may have come from the non-food consumer price index (CPI) cluster as more relief was derived from lower oil/fuel prices with the US recession overhang.

Asuncion also cited the CPIs of electricity and transport prices in support of a broader disinflation.

“We see food to remain elevated primarily due to supply constraints and will not be remedied by the BSP’s hiking interest rates. We know that this has prompted Finance Secretary (Benjamin) Diokno to take a whole of government approach in dealing with the challenging situation,” Asuncion said.

Jun Neri, lead economist at Ayala-led Bank of the Philippine Islands, said inflation eased to 8.1 percent in March after likely peaking at 8.7 percent in January.

Security Bank chief economist Robert Dan Roces said inflation settled at eight percent with a range of 7.8 to 8.2 percent in March.

“The food basket remains the prime contributor, but some slight tempering has been observed in food retail prices. Transport is also expected to have tempered, but these may be offset by slightly higher prices in utilities with Meralco increasing its charges for the month,” Roces said.

Security Bank sees the headline inflation trend going lower until the end of the year.

However, Roces pointed out that core inflation may remain elevated, if not flat, in the next two months as this responds with a lag from broader price effects.

ING Bank senior economist Nicholas Mapa said inflation last month likely settled at eight percent, while the average should moderate further from the 8.6 percent average in the first two months of the year.

“On a monthly basis we could even see prices slip modestly as fuel prices decreased as did electricity rates. That being said, price pressures remain broad based with high inflation notes across several sub sectors of items.

Domini Velasquez, chief economist at China Bank, said inflation eased below eight percent to settle at 7.9 percent in March due to a marked slowdown in the prices of food, particularly vegetables, eggs, and fish but was offset by higher prices of rice, meat, and some fruits for the month.

Velasquez said other commodities showed mixed performance as electricity in Meralco-serviced areas went up, while domestic pump prices and LPG prices are down.

Although there are some relief in food prices in recent months, Velasquez said secondary round effects continue to dominate recent inflation figures.

Security Bank sees core inflation to remain elevated at around 7.8 percent before slowly trending downwards.

“In the coming months, we expect inflationary pressure to come from utilities as Meralco is still expected to increase generation charge in April and El Nino by July will drive up utility prices. Moreover, prices of some food commodities seem to be moving upwards, rice and meat in particular. We are still awaiting greater non-monetary interventions to make sure food prices are brought down,” Velasquez added.

Despite the slowdown in the rise in consumer prices, economists are still convinced the Monetary Board would continue to lift interest rates.

“While a number of other external and internal factors can affect the BSP’s decision on May 18, a print above eight percent for March increases the possibility of another 25 bps hike. Slower inflation won’t justify a pause,” Neri said.

According to Neri, a clear downtrend in CPI toward the attainment of the two to four percent inflation target is what’s necessary to justify a pause.

Mapa believes otherwise as a soft inflation for April could allow the BSP to shift to a pause during its next rate-setting meeting scheduled on May 18.

“In the past, the mantra was, no peak no pause. So far we’ve seen the peak in January, one month of flat month-on-month. If we get two months of negative month-on-month, this could fulfill what Governor (Felipe) Medalla said would be one factor to determine a pause: seeing prices actually fall,” Mapa said.

Asuncion sees another smaller 25-basis point hike next month that could bring the terminal rate to 6.50 percent but could be reduced to six percent by the end of the year and further to a range of four to five percent in 2024.

“Now, if and when, disinflation does accelerate later in 2023, the BSP policy rate of 6.50 percent is way too high. For a policy rate to be neutral to BSP’s inflation objective without compromising economic growth goals, the prevailing policy rate should promote a real interest rate condition of zero or the nominal interest rate should match or stays in line with inflation expectations,” Asuncion said.