DBS hikes 2022 inflation forecast for Philippines to 5.5%

MANILA, Philippines — DBS Bank Ltd. of Singapore raised its 2022 inflation forecast for the Philippines to 5.5 percent from the original target of five percent.

In a report, DBS economist Chua Han Teng said the Philippine inflation is still in an uncomfortable zone despite the slight dip to 6.3 percent in August from 6.4 percent in July.

“We are raising our 2022 average inflation forecast to 5.5 percent from five percent previously while keeping our 2023 projection unchanged at four percent,” Teng said.

Inflation averaged 4.9 percent from January to August, staying above the BSP’s two to four percent target range, despite easing for the first time in six months in August due to slower food and fuel price increases.

Teng said the headline rate remained well above the BSP’s two to four percent inflation target, and core inflation picked up for the eighth straight month to exceed four percent year-on-year in August.

“Second-round price effects are still set to feed through into the economy from another round of public jeepney fare increases that is due in September,” Teng said.

With the US Federal Reserve possibly keeping pace with aggressive rate hikes of 75 basis points, the economist said the peso remains vulnerable to weakness against the   dollar, which would pose imported inflation threats and partially negate some of the commodity price correction.

“The peso is the third worst performing currency in Asia so far this year, weakening by 11 percent versus the dollar,” Teng said.

After weakening to an all-time low of 57.18 to $1 last Sept. 8, the local currency snapped its six-day losing streak and strengthened back to the 56 to $1 level after it gained 36 centavos to close at 56.82 last Friday.

Last Aug. 18, the   Monetary Board raised its inflation forecast to 5.4 instead of five percent for this year, but lowered its projections to four instead of 4.2 percent for 2023 and to 3.2 instead of 3.3 percent for 2024.

After starting its liftoff last May 19, the BSP has so far raised key policy rates by 175 basis points, including the huge 75-basis-point hike during a surprise off-cycle rate setting meeting last July 14, to curb rising inflationary pressures.

“The BSP is among the most hawkish in the region and is likely to remain so for the remainder of the year as it aims to bring inflation back to target,” Teng said.

BSP Governor Felipe Medalla earlier signaled that the central bank may moderate the tightening pace by delivering one or two 25-basis-point increase for the rest of the year, bringing the policy rate back to the pre-pandemic level of four percent.

Teng said the still elevated inflation figures in August support further interest rate hikes both in the Philippines and Thailand.

“A 50-basis-point hike still cannot be fully ruled out, especially given the fluid external environment and its potential upside spillovers onto Philippines’ inflation dynamics, coupled with quite negative real interest rate,” Teng said.