Philippines: Inflation may remain high at 4.8% next year

MANILA, Philippines — Inflation may remain elevated next year, staying well above the two to four percent target set by the Bangko Sentral ng Pilipinas (BSP), according to New York-based think tank Global Source Partners Inc.

In a report, former finance undersecretary Romeo Bernardo, country analyst at GlobalSource, said that inflation may remain elevated at about 4.8 percent next year.

“We expect 2023 inflation to average 4.8 percent, higher than the BSP’s forecast. Although the combination of softening oil prices, peso appreciation as well as the cumulative impact of interest rate hikes will help tame inflation pressures, continuing uncertainty on food import policies, scheduled increases in water rates in the Metro Manila area, and recent developments in the electricity market are countervailing factors,” Bernardo said.

He cited the suspension of a 670-megawatt power supply agreement between the biggest electricity distributor in the Luzon grid and one of its suppliers, forcing the former to source higher-priced emergency supply from alternative sources, including the spot market.

Last Thursday, the BSP decided to retain this year’s inflation forecast at 5.8 percent, but raised next year’s projection to 4.5 percent from the original target of 4.3 percent.

“While keeping its 5.8 percent inflation forecast this year, the BSP raised its forecast for 2023 from 4.3 to 4.5 percent. It expects inflation to peak in December, but remain elevated through the first half of 2023, with risks still on the upside,” Bernardo said.

For 2024, the BSP sees inflation falling below the two to four percent target range at 2.8 percent.

For 2022, the central bank raised its key policy rates by 350 basis points to tame inflation and stabilize the peso – a complete reversal of the 200-basis-point cut to cushion the impact of the COVID-19 pandemic on the economy.

This brought the overnight reverse repurchase rate to a 14-year high of 5.50 percent from an all-time low of two percent.

BSP Governor Felipe Medalla earlier said in an interview with Bloomberg Television that a pause from the ongoing tightening cycle is unlikely in the next two rate-setting meetings of the Monetary Board next year.

During the question and answer, Bernardo said the BSP governor signaled that there is no basis for ruling out further rate increases next year, but reiterated that any policy action will be data-dependent.

Likewise, he added that monetary authorities are less concerned now about interest rate differentials, and thus would not necessarily match hikes delivered by the US Federal Reserve going forward as the peso bounced back to the 55 to $1 range after slumping to an all-time low of 59 to $1 in October.