Philippines: Elevated inflation seen to persist

MANILA, Philippines — Economists further raised their inflation forecasts over the next two years after the higher-than-expected inflation print in January, according to results of the survey conducted by the Bangko Sentral ng Pilipinas (BSP) for February.

Dennis Lapid, officer-in-charge of the BSP’s Department of Economic Research (DER), said the survey for February showed that private sector economists lifted their inflation forecast to six percent from 4.9 percent for 2023.

“Analysts expect inflation to remain above the upper end of the government’s target range in 2023, given the higher-than-expected January 2023 inflation print as well as due to demand-side price pressures and supply shocks,” Lapid said.

He said risks to the inflation outlook remain tilted to the upside due to the continued recovery of domestic demand, alongside high prices of goods and services due mainly to supply-related concerns and second-round effects.

Inflation quickened to a fresh 14-year high of 8.7 percent in January from 8.1 percent in December. It accelerated to 5.8 percent in 2022, exceeding the BSP’s two to four percent target, from 3.9 percent in 2021, due to the impact of Russia’s invasion of Ukraine on global oil prices as well as the zero-COVID policy of China on food prices.

Lapid said the higher-than-expected inflation in January suggests that inflation would remain elevated in the coming months, prompting the BSP to raise its inflation forecasts to 6.1 percent from 4.5 percent for 2023 and to 3.1 percent from 2.8 percent for 2024.

According to the BSP, the inflation path is expected to be above target in the first half before decelerating toward the target ranges in the second half.

Recent figures indicate that for countries like the Philippines, where commodity prices tend to have a stronger effect on consumer price inflation due to the high share of food and energy in its consumption basket, the timely implementation of non-monetary interventions are crucial to address supply constraints.

According to Lapid, the upside risks to inflation include high prices of goods and services, including oil and food, due to supply-related concerns attributed mainly to weather disturbances and geopolitical tensions such as the ongoing Russia-Ukraine war.

He said a few analysts also cited the recovery of private consumption and government spending, depreciation of the peso against the dollar, rising inflation expectations as well as second-round effects, particularly higher utility rates and transport fares as some of the upside risks to inflation outlook.

Korea Exchange Bank has the highest inflation forecast for 2023 at 10.5 percent, followed by eManagement for Business and Marketing Services at 8.27 percent, UnionBank at 7.8 percent, Bank of Commerce at 6.51 percent, Philippine Equity Partners at 6.4 percent, Robinsons Bank at 6.3 percent and state-run Land bank of the Philippines at 6.1 percent.

Lapid said economists believe that the monetary actions of the BSP are expected to cool down inflation, especially in the second half.

He pointed out that only a handful of analysts mentioned possible downside risks to inflation such as base effects, heightened uncertainty on the recovery of the global economy, slow reopening of China as well as existing non-monetary measures by the national government that are expected to help boost food supply and temper domestic prices.

Based on the probability distribution of the forecasts provided by 18 out of 24 respondents, analysts assigned a slim 1.9-percent probability, down from 10.3 percent in the previous survey that average inflation for 2023 would settle within the government’s two to four percent range.

On the other hand, the analysts gave a 97-percent probability that inflation would exceed four percent.

For 2024, the private sector economists also raised their inflation projections to four percent from 3.7 percent with Korea Exchange Bank expecting inflation to soar to 12 percent, followed by Al-Amanah Islamic Bank at 5.5 percent, and Metropolitan Bank and Trust Co. with a range of 4.5 to 5.5 percent

Lapid said that the probability that inflation would fall within the target band for 2024 declined to 57.9 percent from 65.3 percent.

After the cumulative 400-basis-point rate hikes since May last year, Lapid said economists anticipate the BSP to further tighten monetary policy settings by raising key policy rates by 25 to 50 basis points this year.

With the additional 50-basis-point rate increase last Thursday to tame inflation, the benchmark interest rate now stands at a 16-year high of six percent from an all-time low of two percent.