Inflation likely cooled to 4% in Dec.

Headline inflation may have further eased in December and settled to within the 2-4% target for the first time in almost two years amid lower prices of fruits and vegetables, electricity and fuel, analysts said.

Inflation likely eased to 4% last month, according to a median estimate of a BusinessWorld poll last week. This is within the 3.6% to 4.4% forecast given by the Bangko Sentral ng Pilipinas (BSP) last week.

December could mark the first time inflation returned to the BSP’s 2-4% target after 20 straight months of going above target. It would also be the slowest since 3% in February 2022.

At 4%, the December inflation would be a tad slower than 4.1% in November and significantly lower than 8.1% in December 2022. 

This would also bring the full-year inflation to 6%, matching the BSP’s average baseline forecast for 2023.

The Philippine Statistics Authority is scheduled to release consumer price index data for December on Jan. 5. 

In a statement on Friday, the BSP said lower prices of vegetables, fruits, fish, electricity and fuel might have contributed to the downward price pressure. 

On the other hand, higher prices of rice and meat would likely be the primary sources of upward pressures, the central bank said. 

“Going forward, the BSP will continue to monitor developments affecting the outlook for inflation and growth in line with its data-dependent approach to monetary policy decision making,” it added. 

Philippine National Bank economist Alvin Joseph A. Arogo said in an e-mail that inflation might have slowed to 4% in December due to base effects and lower electricity rates.   

Manila Electric Co. cut the rate for a typical household by P0.6606 to P6.5332 per kilowatt-hour last month.

China Banking Corp. Chief Economist Domini S. Velasquez noted that most of the upward price pressures last month came from food items. 

“However, their impact was partially offset by declines in the prices of vegetables, eggs, sugar and electricity. Additionally, despite recent oil price hikes, domestic pump prices, on average, were lower month on month,” she said in an e-mail. 

In December alone, pump price adjustments stood at a net increase of P0.3 a liter for gasoline. Diesel and kerosene prices had a net decrease of P0.35 and P0.51 respectively.

“Waning pent-up demand will see prices of basic consumer products cool compared with a year ago. Further, with global oil prices moderating, that should help lower average gasoline prices on a year-earlier basis,” Sarah Tan, an economist from Moody’s Analytics, said in an e-mail. 

HSBC economist for ASEAN (Association of Southeast Asian Nations) Aris Dacanay said inflation is still “more-or-less sticky.”   

“This is because the drop in fuel prices was likely offset by the rise in global rice prices as these re-spiked due to El Niño risks. Moving forward, elevated rice prices will likely put a floor under how much inflation can ease in the Philippines throughout 2024,” he said.

Data from the Agriculture department showed that regular-milled rice prices stood at PHP 52 a kilo as of Dec. 29, at the high end of the PHP 33-PHP 52 band on Nov. 30. Retail prices of well-milled rice also went up to as much as PHP 56 a kilo.

The typical surge in domestic demand due to holiday spending might have also kept inflation high, Mr. Dacanay said.   

“With inflation sticky, the December print will likely reinforce the BSP’s hawkish view that high interest rates will likely persist throughout (2024),” he said.

At its December meeting, the Monetary Board left its target reverse repurchase (RRP) rate unchanged at a 16-year high of 6.5%. This was the second straight meeting that the BSP stood pat since its 25-basis-point (bp) off-cycle hike on Oct. 26.    

The central bank raised borrowing costs by a total of 450 bps from May 2022 to October 2023.

BSP Governor Eli M. Remolona, Jr. earlier said inflation was not yet out of the woods, and borrowing costs may need to stay higher for longer in 2024.    

The central bank expects full-year inflation to have hit 6% in 2023, before easing to 3.7% in 2024 and 3.2% for next year.   

Risk to outlook
“Looking ahead to 2024, there is a good chance that full-year inflation will already settle within target, barring any new supply shocks,” Ms. Velasquez said. 

However, the key risks to the inflation outlook this year include the impact of El Niño on food and utilities, higher global oil prices, potential increases in transport fares, and minimum wage adjustments in some regions, she said. 

“Should the easing inflation trend continue in December, this will support the case for BSP’s tightening cycle to end. We see inflation likely bumping around the 4% mark in early 2024 before returning firmly to BSP’s target range by mid-2024,” Ms. Tan said. 

Mr. Dacanay said the extension of lower tariffs on key commodities would help keep inflation expectations at bay, which will give the BSP room to begin its easing cycle by the middle of 2024. 

President Ferdinand R. Marcos, Jr. last month signed Executive Order No. 50, which extends the reduced Most Favored Nation (MFN) tariff rates on rice, corn and pork until Dec. 31.

The rates for rice imports will be kept at 35% for shipments both within or over the minimum access volume quota. Tariff rates for swine, fresh, chilled or frozen meat are retained at 15% for in-quota and 25% for out-quota imports. Imports for corn maintained the MFN duty at 5% and 15% for in-quota and out-quota shipments, respectively.

Mr. Arogo said inflation would only settle “sustainably” within the BSP’s 2-4% target by the fourth quarter of 2024. 

“As such, the BSP should only cut rates in the fourth quarter and we believe that a total of 50 bps would be appropriate,” he said.

A 50-bp worth of cuts this year would bring the key rate down to 6%.

“Our baseline inflation forecasts assume some rebound in oil prices and agricultural disruptions due to El Niño. If supply-demand conditions continue to improve, however, price growth may enter the target range continually at an earlier date,” Mr. Arogo said. 

However, investors are pricing in a total of 75-bp cuts from the US Federal Reserve in 2024, he said. 

“Therefore, the risk to our estimates worth noting is the possibility that the reduction in the target RRP rate could happen earlier than the fourth quarter and the magnitude might be more than 50 bps,” he added. 

The US central bank kept borrowing costs unchanged at 5.25-5.5% in December. This was after it hiked policy rates by 525 bps from March 2022 to July 2023.

“We expect a pretty good outlook until early this year including a strong peso vis-à-vis the US dollar,” Colegio de San Juan de Letran Graduate School Associate Professor Emmanuel J. Lopez said. 

The peso closed at PHP 55.37 versus the dollar on Friday, up by 11 centavos from Thursday’s PHP 55.48 finish. Year to date, the peso appreciated by 38.5 centavos or 0.69% from its PHP 55.755 a dollar close on Dec. 29, 2022.

The Monetary Board will hold its first policy review this year on Feb. 15. – By Keisha B. Ta-asan, Reporter