Inflation seen further easing

MANILA, Philippines — Private economists lowered their inflation forecasts for this year, as prices cooled due to the aggressive rate hikes delivered by monetary authorities, according to the Bangko Sentral ng Pilipinas (BSP).

Dennis Lapid, officer-in-charge of the BSP’s Department of Economic Research (DER), said the results of the latest survey of private economists showed a lower mean inflation forecast of 5.8 percent for this year from six percent in the previous month’s survey round.

Lapid said the mean inflation forecast of private economists was higher than the latest assessment of 5.5 percent by the BSP.

“For 2023, analysts expect inflation to settle above the upper end of the government’s target range for the year owing mainly to supply shocks. Risks to the inflation outlook remain tilted to the upside due to elevated prices of goods and services brought about by supply chain disruptions,” Lapid said.

He said upside risks to inflation are seen to emanate mainly from high prices of services, such as restaurant and accommodation services, as well as goods including food and oil due mainly to supply-related concerns.

“These supply-side disruptions, in turn, are attributed to weather disturbances given the impending El Niño phenomenon, geopolitical tensions such as the ongoing Russia-Ukraine war, and international trade restrictions,” he said.

He pointed out that some economists also cited the continued recovery of private consumption given improved labor market conditions, along with second round effects, particularly higher transport fares and utility rates, as well as potential upside to inflation.

On the other hand, Lapid said downside risks to inflation identified by a few economists could come from increased uncertainty on the recovery of the global economy, including risks of recession in the US and slowdown in China; higher short-term interest rates owing to the BSP’s policy rate increases; and gradual normalization of global supply chains, which could mitigate imported inflation.

He said other downside risks are negative base effects; declining oil prices that could lead to lower transport cost; lower coal prices to pull down electricity costs, and improved food supply level.

The highest inflation forecast came from eManagement for Business and Marketing Services at 6.6 percent, followed by Mizuho at 6.4 percent; EastWest Bank and Bangkok Bank at 6.1 percent; Metrobank, UBS, Deutsche Bank, Modular Asset Management and Al-Amanah Islamic Bank at six percent, and ANZ at 5.9 percent.

Headline inflation averaged 7.9 percent in the first four months of the year – still above the BSP’s two to four percent target range, despite easing for the third straight month to an eight-month low of 6.6 percent in April from 7.6 percent in March.

Based on the probability distribution of the forecasts provided by 19 out of the 24 respondents in the survey, Lapid said there is near certainty or 99.2-percent probability that inflation would exceed four percent this year, while there is a slim 0.8 percent chance that average inflation for 2023 would settle within the two to four percent target range.

For 2024 and 2025, Lapid said inflation forecasts were unchanged at 3.6 percent and 3.5 percent, respectively.

Lapid added that the probability that inflation would settle within the two to four percent target range is higher at 75.5 percent for 2024 and 70.6 percent for 2025.

To tame inflation and stabilize the peso, the BSP embarked on a year-long tightening cycle that saw key policy rates rise by a cumulative 425 basis points since May last year.

After a prudent pause last Thursday, the benchmark interest rate stood at a 16-year high of 6.25 percent from an all-time low of two percent.

Lapid said majority of the economists believe that the BSP would take a pause from its tightening cycle in the second and third quarters of this year.

However, he said most respondents of the survey anticipate a policy reversal in the fourth quarter with a rate cut ranging between 25 and 125 basis points for this year and an additional reduction of 50 to 150 basis points for 2024.

For 2025, Lapid said economists have penciled another round of tightening cycle with rate hikes ranging from 25 to 100 basis points.