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Nomura raises Philippine inflation forecast
MANILA, Philippines — Japanese investment bank Nomura expects the Philippines’ terminal rate hitting 6.75 percent, as stubbornly high inflation would prompt the Bangko Sentral ng Pilipinas (BSP) to deliver more interest rate increases.
Nomura chief ASEAN economist Euben Paracuelles and analyst Rangga Cipta said the bank has raised its inflation forecast for the Philippines to 5.8 percent from the original target of 5.6 percent for this year, as core inflation continued to climb to 7.8 percent in February from 7.6 percent in January due to a more persistent second-round effects.
Inflation quickened to 5.8 percent last year, exceeding the BSP’s two to four percent target range from only 3.9 percent in 2021 due to soaring global oil prices brought about by Russia’s invasion of Ukraine, as well as elevated food prices due to supply constraints amid the zero COVID policy in China.
The headline inflation eased slightly to 8.6 percent in February from a 14-year high of 8.7 percent in January.
The BSP has so far raised key policy rates by 400 basis points as it matched the aggressive hikes delivered by the US Federal Reserve late last year to tame inflation.
This brought the overnight reverse repurchase rate to a 16-year high of six percent from an all-time low of two percent.
“Given our new inflation forecast and our US team’s view of further Fed hikes in coming months, we add one more 25-basis-point hike by BSP to a terminal rate of 6.75 percent, and thus expect a 25-basis-point hike at each of the next three monetary board meetings,” Paracuelles and Cipta said.
The BSP is widely anticipated to deliver a smaller rate hike of 25 basis points on March 23, as inflation finally eased after accelerating for five straight months since September last year.
“Beyond that, we still expect the BSP to reverse course and start cutting its policy rate, but only from March 2024, in line with our Fed call,” Paracuelles and Cipta said.
Nomura expects the Philippine gross domestic product (GDP) growth slowing down to 5.5 percent this year, lower than the six to seven percent target penned by government economic managers.
Paracuelles and Cipta said the slowdown would be led by lower household spending, as pent-up demand fades and persistently high inflation hurts household purchasing power.
Because of the weaker economic environment, Nomura believes the government’s target under its medium-term fiscal framework (MTFF) will be challenging.
Nomura sees the government’s budget deficit narrowing to 6.6 percent of GDP this year from 7.3 percent last year.
“We think revenues will underperform this year, given our nominal GDP growth forecast is lower than in the MTFF. Importantly, we think expenditures will hold up, led by capital outlays under the “build back more” infrastructure program,” the economists said.
According to Nomura, high food and energy prices and persistent domestic inflation pose downside risks to growth while upside risks include higher foreign direct investment inflows and faster roll-out of infrastructure.
Source: https://www.philstar.com/business/2023/03/13/2251144/nomura-raises-philippine-inflation-forecast