Philippines: Inflation seen remaining high

MANILA, Philippines — Private sector economists see inflation breaching the two to four percent target range set by the Bangko Sentral ng Pilipinas (BSP) until next year amid supply constraints and elevated global oil prices.

Dennis Lapid, officer-in-charge of the Department of Economic Research at the BSP, said the results of the BSP’s survey of private sector economists for August showed higher mean inflation forecast for 2022 at 5.4 percent from 5.3 percent in the July survey.

“Analysts expect inflation to breach the upper end of the government’s target range in 2022, with risks to the inflation outlook tilted to the upside amid lingering inflationary pressures brought about by global supply chain disruptions, second round effects, and continued depreciation of the peso against the dollar,” Lapid said.

He said the forecast for next year was unchanged at 4.2 percent, while that for 2024 was lowered to 3.7 percent instead of 3.9 percent.

“Meanwhile, inflation is expected to settle above the upper end of the target in 2023 and decelerate to within the target range in 2024,” Lapid said.

According to Lapid, most of the analysts anticipate the BSP to further tighten monetary policy settings and increase the reverse repurchase rate by a range of 25 to 150 basis points this year, with the possibility of taking a pause in its tightening cycle by 2023 and 2024.

However, the BSP has so far raised interest rates by 175 basis points this year, including the huge 75-basis-point hike during a surprise off-cycle rate-setting meeting last July 14.

The reverse repurchase rate is now at 3.75 percent after the central bank delivered another 50-basis-point increase last Aug. 18 to further anchor inflationary expectations.

Lapid said economists believe that the major upside risks to inflation include still elevated global food and oil prices amid global supply chain disruptions brought about by the ongoing Russia-Ukraine war, as well as due to the continued COVID-related lockdowns in China and local weather disturbances.

Other risks, he added, include the higher prices of selected goods and services due to delayed reaction to rising input costs, the continued depreciation of the peso against the dollar due in part to the aggressive policy rate hikes by the US Federal Reserve, as well as the second-round effects such as higher transport costs and wage hikes.

Meanwhile, Lapid said analysts observed the recent easing of global oil prices, which is a possible source of downside risk to the inflation outlook.

Other downside risks cited are expectations of policy rate hike by the BSP, resurgence of COVID cases, fears of an impending global economic recession, along with weaker-than-expected global economic recovery due to the slowing down of China’s economy.

Based on its latest assessment, the BSP raised its inflation forecast to 5.4 instead of five percent this year, but lowered the projections to four percent for 2023 and to 3.2 percent for 2024.

Based on the probability distribution of the forecasts provided by 17 out of 23 respondents, Lapid said economists assigned a slim 2.7-percent probability that average inflation for 2022 would settle within the two to four percent target range, while there is a 96.2-percent chance that inflation would exceed four percent.

Meanwhile, Lapid said the probability that inflation would fall within the target band in 2023 has increased to 56 percent from 38.2 percent and for 2024 also increased to 73.5 percent from 60.7 percent.

Korea Exchange Bank has the highest inflation forecast for this year at 6.5 percent followed by Al-Amanah Islamic Bank at six percent, Maybank at 5.75 percent, and UBS at 5.6 percent. CTBC Bank has the lowest inflation projection for 2022 at 4.85 percent.

For 2023, Korea Exchange Bank has the highest projection at 6.3 percent followed by Al-Amanah Islamic Bank at 5.6 percent, Metropolitan Bank & Trust Co. at a range of three to five percent, Security Bank at 4.6 percent, and East West Bank at 4.5 percent.

Inflation averaged 4.7 percent in the first seven months of 2022, breaching the two to four percent target range, after accelerating to 6.4 percent in July.