Central bank sees 2.8-3.6% inflation in January

HEADLINE INFLATION may have settled within 2.8-3.6% in January due to lower vegetable and sugar prices, the Bangko Sentral ng Pilipinas (BSP) said on Wednesday.

The BSP’s month-ahead forecast shows that inflation likely further eased from the 22-month low of 3.9% in December and 8.7% in January 2023.

The lower end of the forecast or 2.8% could be the slowest since 2.3% in October 2020 amid the coronavirus pandemic.

January would also mark the second straight month that inflation would settle within the BSP’s 2-4% target.

The Philippine Statistics Authority will report January inflation data on Feb. 6.

“Higher prices of some agricultural items like rice, meat, fruits, and fish, along with increased petroleum prices, electricity and water rates, annual adjustment in sin taxes, and the depreciation of the peso are the primary sources of upward price pressures for the month,” the BSP said.

Data from the Department of Agriculture showed that as of Jan. 31, prices of regular milled rice had risen to as much as PHP 53 per kilo from PHP 52 on Dec. 29.

Fuel retailers implemented price hikes in January. For the month, pump price adjustments stood at a net increase of PHP 4.40 a liter for gasoline, PHP 2.90 a liter for diesel, and PHP 0.85 a liter for kerosene.

Manila Electric Co. (Meralco) earlier said the rate for a typical household went up by PHP 0.6232 to PHP 10.9001 per kilowatt-hour (kWh) in January.

Metro Manila’s two main water concessionaires also began implementing higher rates in January. Manila Water Co. raised rates by PHP 6.41 per cubic meter, while Maynilad Water Services, Inc. hiked rates by PHP 7.87 per cubic meter.

The peso also weakened to the PHP 56-a-dollar mark in January, closing the month at PHP 56.275 on Wednesday, down by 90.5 centavos or 1.6% from its PHP 55.37 finish on Dec. 29, 2023.

“Lower prices of vegetables and sugar could contribute to downward price pressures,” the BSP said.

The central bank said it would continue to monitor developments that could affect the inflation and growth outlook.

Makoto Tsuchiya, an economist at Oxford Economics Japan, said inflation might have hit 2.5% in January due to favorable base effects despite price pressures from some commodity items.

“The sequential pickup among food items will likely remain manageable, although daily prices suggest there might be a scope for a further pickup in the coming months given weather-related disruptions,” he said in an e-mail.

Market players are concerned with how El Niño would affect food prices. The phenomenon, which affects local agricultural production, is expected to last until the second quarter of the year, according to the state weather bureau.

Mr. Tsuchiya said the BSP might start cutting policy rates in the second quarter despite easing inflation.

“Just as January inflation is suppressed by favorable base effects, we expect the year-on-year inflation rate to pick up in the second quarter as the base effects turn less favorable,” he said.

Last year, inflation peaked at 8.7% in January before it gradually slowed to 4.7% in July. Inflation picked up again in the third quarter before easing back to the 2-4% target in December.

Full-year inflation stood at 6% in 2023, up from 5.8% in 2022 and breaching the BSP’s 2-4% target for the second straight year.

“That said, we think the inflation rate will remain within the BSP’s target, and our expectation for the US Fed to start cutting in the second quarter should also boost the bank’s confidence in easing monetary policy,” Mr. Tsuchiya added.

BSP Governor Eli M. Remolona, Jr. earlier said the Monetary Board might cut borrowing costs this year, but policy easing in the first half may be too soon amid risks to the inflation outlook.

The Monetary Board hiked key policy rates by 450 basis points (bps) from May 2022 to October 2023 to tame inflation and stabilize the peso, making it the most aggressive central bank in the region.

After raising the policy interest rate by 350 bps in 2022, the BSP increased the target reverse repurchase rate by another 100 bps throughout 2023. This brought the key rate to 6.5%, the highest in 16 years.

The BSP’s risk-adjusted inflation forecast is at 4.2% this year and 3.4% for 2025. Meanwhile, its average inflation baseline forecast is at 3.7% for 2024 and 3.2% for next year.

The BSP is scheduled to have its first policy review of the year on Feb. 15. – Keisha B. Ta-asan, Reporter