CITIGROUP, INC. (Citi) expects Philippine headline inflation to average 5.3% this year, above the central bank’s 2-4% target, with food prices remaining elevated and subject to further upside due to weather disturbances.

“Our expectation for inflation this year is still pretty high at 5.3% on average, before lowering to about 3.3% next year,” Citi Economist for Thailand and the Philippines Nalin Chutchotitham said in a media briefing on Wednesday.

The bank sees inflation at 7.1% in the first quarter, 5.9% in the second, 4.9% in the third, and 3.6% in the fourth quarter.

Ms. Chutchotitham noted that the main factors driving the estimate are the continued pass-through of higher production costs in 2022 into 2023, import dependency in certain food items, and robust domestic demand, causing inflation to broaden towards services as well as goods.

“There are still some concerns about agricultural production and also potential severe weather impacting agricultural production projections,” she added.

Ms. Chutchotitham also noted that the bank is also keeping an eye on how food inflation reacts to strong domestic demand.

The Bangko Sentral ng Pilipinas (BSP) will be closely watching inflation, Citi noted, with the central bank expected to hike rates by 25 basis points (bps) in the next policy setting meeting in mid-February. Monetary authorities have downplayed the need for any further “jumbo” rate hikes.

The BSP hiked benchmark rates by 350 bps in 2022, bringing its key rate to a 14-year high of 5.5%, from a record low of 2% in 2021. The next meeting is scheduled for Feb. 16.

Ms. Chutchotitham said Citi expects the BSP to hike rates by only 50 bps this year, bringing the key rate to 6%. It expects this to happen within the first half, she added.

Citi sees economic growth this year slowing to 6.2% from 2022’s 7.6%, due to higher financing costs and expectations of a global slowdown.

The 2022 reading was the highest since 1976 amid robust domestic demand, the Philippine Statistics Authority said.

Going forward, Citi expects the BSP to bring policy rates to above 4% by the end of 2024, which will help ease overall financing costs.

Ms. Chutchotitham expects the Philippines to continue its rapid growth trajectory from last year.

Gross domestic product in the fourth quarter expanded 7.2%, against the 7.6% posted in the third quarter and 7.8% a year earlier.

“As you can see from the momentum of gross domestic product over the past few quarters, we can see that household spending remains well supported by the strong employment growth,” Ms. Chutchotitham said.

“We do also see the younger population supporting overall spending and labor income growth,” she added.

The expected easing in inflation, as well as the revival of tourism, remittances, investment and public spending will be the main drivers of the growth forecast for this year, Ms. Chutchotitham said. — Aaron Michael C. Sy