Economists lower 2023 inflation forecast

PRIVATE SECTOR economists lowered their inflation outlook for this year, with most expecting the Bangko Sentral ng Pilipinas (BSP) to begin trimming policy rates by the fourth quarter of this year.

Based on the results of the BSP’s survey of private economists in May, analysts now see average inflation for 2023 settling at 5.8%, versus 6% in the April survey. This is slightly higher than the BSP’s revised 5.5% full-year forecast.

The economists’ mean inflation forecasts for 2024 and 2025 were kept at 3.6% and 3.5%, respectively.

According to the BSP, analysts expect inflation to breach the 2-4% target range due to the impact of supply shocks.

“Risks to the inflation outlook remain tilted to the upside due to elevated prices of goods and services brought on by supply chain disruptions,” the BSP said in its latest Monetary Policy Report.

Headline inflation slowed for a third straight month in April, easing to 6.6% from 7.6% in March. For the first four months of the year, inflation averaged 7.9%, higher than the 3.7% seen a year ago.

The BSP said these supply-side disruptions may be driven by weather disturbances such as the El Niño phenomenon as well as geopolitical tensions like the Russia-Ukraine war and global trade restrictions. 

“A few analysts also cited the continued recovery of private consumption given improved labor market conditions, as well as second-round effects, particularly higher transport fares, and utility rates as potential upside risks to inflation,” it added.

The Philippine economy expanded by 6.4% in the first quarter, slower than the 8% expansion during the same period a year ago. Household consumption, which contributes around three-fourths to gross domestic product (GDP), grew by 6.3% in the January-to-March period, slower than the 10% a year ago.

The BSP said risks to the inflation outlook remain skewed to the upside through 2024, “warranting continued readiness to resume monetary action if necessary.”

Meanwhile, analysts cited the looming US recession, slowdown in China, normalization of global supply chains, and the impact of the BSP’s policy rate increases as downside risks to inflation.

The BSP has raised borrowing costs by a total of 425 basis points (bps) since May last year, bringing the key rate to 6.25%, the highest in nearly 16 years.

On Thursday, the BSP decided to keep rates unchanged, and signaled it will likely remain unchanged until the third quarter.

Based on the probability distribution of the forecasts provided by 19 out of 26 analysts, the BSP said there is a “near certainty” or a 99.2% chance that inflation will exceed the 2-4% target range.

There is only a slim or 0.8% probability (from 0.7% previously) that average inflation will settle within the target band.

For next year, the probability that inflation will fall within the target band rose to 75.5% (from 68.8%).

For 2025, there is a 70.6% chance (from 67.5%) that inflation will settle well within the 2-4% target, the BSP said.

CUTS

Meanwhile, analysts expect the BSP to start trimming rates by 25-125 bps in the fourth quarter, by up to 250 bps in 2024 and by 100 bps in 2025.

There were 26 respondents in the BSP’s survey of private sector economists this month. The survey was conducted from May 5 to May 11. 

The BSP measures inflation expectations by analyzing the inflation forecasts of households, business managers, and private sector economists, as well as the reasons they cite to support their individual forecasts.

Pantheon Macroeconomics Chief Emerging Asia Economist Miguel Chanco said the BSP may cut policy rates by 50 bps in the fourth quarter this year, given no further inflation shocks.

“We don’t think this will be a barrier, as we see the first Fed cut in September, in view of weakening growth, a durable downshift in core inflation, and moderating wage growth,” Mr. Chanco said.

BSP Governor Felipe M. Medalla earlier said it is dangerous to cut policy rates faster than the US Federal Reserve this year as it could cause the peso to depreciate against the dollar.

Meanwhile, ANZ Research economist Debalika Sarkar said the central bank may keep the key interest rate at 6.25% for the rest of the year. 

“On our part, we believe that an improving FX (foreign exchange) outlook, as supported by robust international reserves and weakening import demand, as well as broadening growth challenges and softening inflation to have opened the door for the BSP to remain on hold for the remainder of 2023,” she said.

In the BSP’s Monetary Policy Report, the central bank sees the country’s gross domestic product (GDP) to settle within the government’s 6-7% growth target for this year.

However, the Philippine economy “is projected to settle below the 6.5-8% target for 2024,” the BSP said. This reflects weaker global growth prospects, as well as the impact of the total 75-bp rate increase of the BSP in the first quarter this year. — K.B. Ta-asan