Inflation likely within target until ’26

Private sector economists expect inflation to remain within the central bank’s 2-4% target from this year to 2026, the Bangko Sentral ng Pilipinas (BSP) said.

The BSP’s latest survey of external forecasters in its Monetary Policy Report showed that analysts’ mean inflation forecast for this year stood at 3.1%, lower than the central bank’s 3.3% baseline projection.

The survey showed an 82.6% likelihood that inflation will settle within target this year and an 83.5% probability for 2026.

“Inflation expectations continue to be well-anchored. Risks are broadly balanced, with headline inflation expected to stay low and manageable over the medium term.”

For 2026, economists expect inflation to average 3.2%, also below the BSP’s 3.5% forecast.

Headline inflation averaged 3.2% in 2024, well within the target band. January inflation data will be released on Feb. 5.

The survey showed the within-target inflation outlook is mainly driven by easing rice and oil prices.

“Downside risks to the inflation outlook are seen to emanate largely from lower rice prices, amid the implementation of Executive Order (EO) No. 62 and lower oil prices,” the BSP said,

President Ferdinand R. Marcos, Jr. last June signed EO 62, which slashed rice import tariffs to 15% from 35% until 2028, citing the need to curb rice prices.

Rice inflation has slowed to 0.8% in December from 5.1% in November and 19.6% a year prior. Rice is typically the biggest contributor to overall inflation.

Global crude oil prices are seen to ease further, the BSP said.

“Futures prices have declined due to market expectations of higher US oil production and expectations of weaker global demand as well as the likelihood of global oversupply.”

“This in turn led to a delay in the anticipated increase in oil production by the Organization of the Petroleum Exporting Countries and other partner countries (OPEC+).”

However, the central bank warned that inflation could breach the 2-4% band if Dubai crude oil prices average above $90 per barrel from this year to 2026.

The Development Budget Coordination Committee expects Dubai crude oil to range from $60 to $80 per barrel from 2025 to 2026.

“These oil price scenarios consider only direct effects and do not incorporate potential second-round effects on transport fares, food prices, and wage increases.”

The surveyed analysts also flagged upside risks to the inflation outlook such as supply disruptions due to geopolitical tensions and adverse weather conditions.

“The potential spike in electricity rates, higher-than-expected wage adjustments, and protectionist US trade policies were also identified as upside risks,” it added.

The BSP also noted the possibility of rising electricity rates in the coming months.

“In July 2023, the Supreme Court nullified the previous cap on Wholesale Electricity Spot Market (WESM) prices for November 2013 and December 2013. Electricity rates could rise due to the potential increase in generation charges being passed on to consumers.”

The central bank earlier warned that the balance of risks to the inflation outlook remain tilted to the upside for this year and the next.

The BSP expects inflation to settle at the midpoint of the 2-4% target until the first half of 2025, before accelerating to the upper end of the target from the second half of 2025 to the first half of 2026.

Inflation will ease closer to the midpoint of the target by the second half of 2026, driven by declining global commodity prices, it added.

Further easing

Meanwhile, analysts surveyed by the BSP also expect further monetary policy easing for this year.

“For 2025, the general view is that the BSP will ease its monetary policy stance by a range of 50-100 basis points (bps). Meanwhile, analysts have mixed views on the target reverse repurchase (RRP) rate for 2026,” the BSP said.

Last year, the Monetary Board cut rates by a total of 75 bps, bringing the key rate to 5.75% by end-2024.

“On balance, there is scope for measured monetary policy easing given the within target inflation, manageable underlying price pressures and well-anchored inflation expectations. However, upside risks to inflation warrant close monitoring,” the BSP said.

“A further cut in the policy rate will help reinforce the impact of the prior monetary easing on market interest rates, lending activity, and aggregate demand.”

BSP Governor Eli M. Remolona, Jr. has said there is room to ease further as the current policy rate is still in “restrictive territory.” However, the central bank is likely to deliver further rate reductions in “baby steps.”

‘Below potential’

Meanwhile, the BSP expects the Philippine economy to “grow below potential” over the near term due to subdued demand. The government is targeting 6-8% for 2025 to 2026.

“The outlook for domestic growth indicates a more subdued pace of economic activity up to 2026,” it said.

The BSP expected economic growth in 2024 to settle slightly below the government’s 6-6.5% target, after a weaker-than-expected third-quarter gross domestic product (GDP) print.

Fourth-quarter and full-year GDP data will be released today (Jan. 30).

“However, GDP growth is seen to modestly improve and settle close to the low end of the targets for 2025 and 2026,” the BSP said.

“The decline in global oil prices, the easing of BSP’s monetary policy, and the reduction in the reserve requirement ratio are seen to support domestic economic activity.”

Domestic demand is also seen to “remain firm but subdued.” — Luisa Maria Jacinta C. Jocson