Economists see inflation within target until 2026 — BSP survey

Economists expect inflation to stay within the Philippine central bank’s 2-4% target until 2026, but supply shocks and second-round effects continue to pose risks to the outlook, the Bangko Sentral ng Pilipinas (BSP) said last week.

Analysts’ average inflation estimates this month for 2024 and 2026 were 3.9% and 3.4%, unchanged from BSP’s January survey, it said. Their mean inflation estimate for next year rose to 3.5% from 3.4%.

“Analysts expect inflation to remain manageable this year and settle within the target range,” the central bank said in its latest monetary policy report. “However, risks to the inflation outlook continue to be dominated by upside pressures owing to supply-side shocks and second-round effects.”

Inflation slowed to a three-year low of 2.8% in January from 3.9% in December and 8.7% a year ago, the second straight month it fell within the BSP’s target.

The BSP’s baseline inflation forecast for this year is 3.6% and 3.2% for 2025. Full-year inflation may hit 3.9% and 3.5% this year and in 2025 if risks materialize, it said.

Analysts said supply-side pressures would likely come from El Niño and geopolitical tensions, which could spur price increases in basic commodities and services in the Philippines, the central bank said. “A few analysts also cited second-round effects from wage adjustments and higher electricity rates, as well as positive base effects as upside risks.”

Lawmakers are seeking to increase the minimum wage this year. The Senate wants a PHP 100 minimum wage hike, while the House of Representatives said it is studying a proposal to increase wages by as much as PHP 400.

BSP Senior Assistant Governor Iluminada T. Sicat earlier said the central bank’s baseline projections did not take these proposals into account.

In the report, the BSP said the baseline forecast includes the PHP 40 minimum wage hike in the National Capital Region in July last year and 8.7% average wage increase for nonagricultural workers in areas outside Metro Manila.

The central bank also factored in a possible wage increase of P28 in August and P29 in September 2025. These could lead to an annual increase of 4.6% for both years, in line with historical wage increases.

“(If) the assumed increase in minimum wage is beyond what we have incorporated in the baseline… this could pose a threat to the inflation outlook,” Ms. Sicat told reporters last week.

Meanwhile, analysts expect a 68.2% probability from 63.4% last month that inflation will stay within the target this year, while there is a 31% chance that it will breach 2-4%.

The likelihood of inflation falling within the target next year increased to 78% from 65.9%, while the probability of inflation settling within 2-4% in 2026 rose to 82.9% from 64.2%.

“The results of the survey showed that majority of the analysts anticipate the BSP to keep the current policy setting until the second quarter before reducing the policy rate in the second half of this year by a range of 50 to 125 basis points (bps),” the central bank said. “For 2025, the BSP is seen to further loosen its policy stance by a range of 25 to 300 bps.”

The BSP kept the key rate at 6.5% for a third straight meeting at its first policy review of the year, the highest in nearly 17 years. The Monetary Board tightened borrowing costs by 450 bps from May 2022 to October 2023.

There were 24 respondents in the BSP’s survey of private sector economists, which was held from Feb. 6 to 12.

The BSP said it had lowered its risk-adjusted inflation forecast for this year by 0.5 point to 3.9% due to the lower baseline forecast and decreasing risks.

The central bank removed the impact of higher transport fares from a planned jeepney modernization and lowered the probability of jeepney fare hikes. It also sees less impact from high global oil prices.

It also removed the nonextension of lower tariff rates for pork, rice and corn as risk to inflation.

“While the risks to the inflation outlook continue to tilt toward the upside over the policy horizon, inflation risks in 2024 have eased compared with the previous round,” BSP said.

Still, the estimated impact of risks to the inflation outlook outweighs the possible impact of downside risks, it added. — Keisha B. Ta-asan