By Luisa Maria Jacinta C. Jocson, Reporter
PHILIPPINE INFLATION is seen to remain within target in 2025, analysts said, paving the way for the central bank to continue its easing cycle.
“Looking ahead, inflation will likely be contained reflecting the moderation in global commodity prices, and administrative measures such as tariff cuts on food items, particularly tariff cuts on imported rice from July,” the ASEAN+3 Macroeconomic Research Office (AMRO) Senior Economist Andrew Tsang said.
AMRO expects inflation to settle within the Bangko Sentral ng Pilipinas’ (BSP) 2-4% target range for 2024 and 2025.
“Specifically, average inflation is projected to be 3.2% in 2025, the same level as in 2024, which is a substantial decline from the 6% in 2023,” Mr. Tsang added.
Philippine headline inflation averaged 3.2% in January-November 2024. In 2024, monthly inflation prints have so far stayed within the BSP’s target band except for the 4.4% spike in July.
The BSP expects inflation to average 3.2% in 2024 and 3.3% in 2025.
“We still expect the Philippines’ inflation to remain within the BSP’s 2-4% target range,” Krisjanis Krustins, director at Fitch Ratings’ Asia-Pacific Sovereigns team and primary sovereign ratings analyst for the Philippines, said.
“In my new view, considering all risks and given past and current information, inflation in 2025 will still generally fall within the target range,” Enrico P. Villanueva, a senior lecturer at the University of the Philippines Los Baños Economics Department, said.
The Philippines has grappled with elevated inflation since 2022 amid external headwinds and supply-chain disruptions. From April 2022 to November 2023, inflation breached the 2-4% target band.
“The inflation outlook for 2025 largely hinges on external factors like commodity prices and exchange rates, as well as domestic supply-side management,” John Paolo R. Rivera, a senior research fellow at the Philippine Institute for Development Studies, said.
“While the BSP’s easing cycle is likely to continue, its trajectory will depend on inflation trends, peso stability, and global monetary policy movements,” he added.
PRICE RISKS
However, analysts flagged potential risks that could stoke inflation anew in 2025.
“There is always a risk that a component of the consumer price index (CPI) will go up, like in electricity and wages as pointed out in BSP medium-term inflation path,” Mr. Villanueva said.
He said that these must be viewed as “regular possibilities.”
“What is crucial for policy making, though, is the severity, likelihood and correlation of these risks. Are the risk possibilities severe and likely enough to occur and will these stand out or be offset by price declines for other items in the consumer basket?” he added.
The BSP earlier said that the risks to the inflation outlook for 2025 and 2026 remain tilted to the upside.
“There could be some upside risk to inflation due to robust economic growth and increases in minimum wages,” Mr. Tsang likewise said.
He cited shocks such as supply-side disruptions due to natural disasters, which could drive up food prices.
“Climate change impacts through potential strings of strong typhoons can make landfall and wreak havoc in Luzon and the Visayas,” Union Bank of the Philippines, Inc., Chief Economist Ruben Carlo O. Asuncion said.
The Philippines has remained the most at-risk country globally for 16 straight years, according to the latest edition of the World Risk Index (WRI), which measures a country’s exposure to natural disasters and societal capacity to respond.
A recent report by the Asian Development Bank (ADB) also showed that the Philippines could potentially lose 18.1% of its gross domestic product (GDP) by 2070 due to climate change under a high emissions scenario.
“Meanwhile, worsening geopolitical tensions in other regions, such as Ukraine and the Middle East, could raise the risk of global supply disruption leading to sharp spikes in commodity prices and shipping costs, and cause another round of upward pressures on inflation,” Mr. Tsang said.
“The impact would be exacerbated if there were to be a sharp depreciation of the peso caused by external shocks,” he added.
Mr. Rivera said the depreciation of the peso due to a stronger dollar or trade imbalances “could increase import costs, exacerbating inflation pressures.”
The peso has closed at its record low of P59 per dollar thrice in 2024.
“The biggest risks to the inflation outlook stem from external developments, in particular trade policy, inflation and interest rates in the US, through their impact on the Philippine peso,” Mr. Krustins added.
Mr. Asuncion also noted the spillovers that could come from the incoming Donald J. Trump administration. Mr. Trump is set to assume the US presidency on Jan. 20.
Economists have warned of the potential impacts of Mr. Trump’s protectionist trade policies on the Philippines, which heavily relies on the United States for business and economic activities.
The US is also the country’s top export destination and top source of remittances.
The country’s reliance on imports also makes it more vulnerable to external shocks, Mr. Rivera said.
“Robust consumer spending driven by improving employment and remittance inflows might create demand-pull inflation as well as the rebound in tourism that could further elevate inflation from the services sector,” he added.
Still, Mr. Tsang noted that the BSP’s risk-adjusted inflation forecasts would still fall within its 2-4% target range. Accounting for risk factors and scenarios, the BSP still sees inflation settling within the target band, with its risk-adjusted forecasts at 3.2% for 2024, 3.4% for 2025, and 3.7% for 2026.
“Despite these risks, if global oil prices stabilize and domestic food supply constraints are addressed, inflation could remain within the BSP’s 2-4% healthy target range. However, managing supply-side pressures will be vital,” Mr. Rivera said.
“Inflation may still remain within target, giving enough room for the BSP to continue its easing cycle, providing economic activities to expand, especially if the government would be prepared to deal with these flagged risks,” Mr. Asuncion added.
FURTHER MONETARY EASING
The central bank has room to continue its policy loosening amid expectations of within-target inflation, the analysts said.
“With inflation expected to remain within target, the BSP will also likely continue its rate-cutting cycle,” Mr. Asuncion said.
Mr. Tsang said the pace of the BSP’s rate-cutting cycle will likely be “gradual and data dependent.”
“Over the past two years, a forceful monetary policy tightening during 2022 and 2023 that brought the policy rate to a 17-year high, together with the government’s direct measures, has helped bring headline inflation back to within the BSP’s inflation target of 2–4%,” he said.
In 2024, the Monetary Board reduced the target reverse repurchase (RRP) rate by 75 basis points (bps) with a 25-bp cut at each of its August, October and December meetings to bring its policy rate to 5.75%.
“From our point of view, there is room to gradually adjust the policy rate to a less restrictive stance in light of lower inflation,” Mr. Tsang added.
Mr. Krustins said the central bank “may still be able to deliver some further rate cuts, but the pace will likely be slower in light of the external risks to the Philippine economy.”
“Given the calibrated behavior of the BSP in the past years, monetary policy in 2025 may continue to adopt a cautious approach in the first half of the year, closely monitoring both inflation and external conditions,” Mr. Rivera said.
Mr. Krustins expects the BSP to ease rates by 100 bps, while Mr. Asuncion forecasts a total of 75 bps worth of cuts in 2025.
“If and as inflation continues to ease and global financial conditions improve, the BSP could reduce policy rates further by another 25 bps to 50 bps by (end-2025), potentially bringing the benchmark rate closer to 5%,” Mr. Rivera said.
BSP Governor Eli M. Remolona, Jr. has said that delivering up to 100 bps worth of cuts in 2025 may be “too much,” but noted that they are “neither more dovish nor less dovish.”
He also signaled the possibility of delivering a rate cut at the Monetary Board’s first policy meeting in 2025.
Economic growth will also be a key consideration for the central bank’s policy stance, Mr. Asuncion said.
“The BSP would be looking at how the economy performs in the fourth quarter and first quarter of 2025 and if the corresponding economic performance would warrant more rate easing support,” he added.
The Philippine economy grew by 5.2% in the third quarter of 2024, the slowest pace in five quarters.
On the other hand, factors that could derail the BSP’s easing cycle include a strong dollar and the pace of the US Federal Reserve’s own easing cycle, analysts said.
“The main risk factor at the moment would be further strengthening of the dollar, for example due to the imposition of tariffs by the new US administration,” Mr. Krustins said.
“However, risks are skewed towards more gradual easing. We note that the interest rate differential between the US and the Philippines is narrower now compared with historical norms,” he added.
Mr. Rivera said a strong dollar or higher-than-expected Fed rates “could pressure the BSP to maintain a more neutral stance to avoid capital outflows and peso depreciation.”
The Fed began its easing cycle in September 2024 with an outsized 50-bp cut and followed it up with two 25-bp reductions at its November and December meetings, bringing its target rate to 4.25%-4.5%.
However, the US central bank has signaled the possibility of slower easing this year amid inflation concerns, with Mr. Trump’s tariff proposals expected to stoke prices.
Further easing by the BSP is also “challenged by elevated global or domestic prices that might force the BSP to hold rates steady or even pause the easing cycle,” Mr. Rivera added.
“What can derail monetary easing is the thinking that all risks to inflation have to be eliminated (that is impossible), and that a high interest rate is the solution to price shocks, which usually affect supply rather than demand,” Mr. Villanueva said.
Keeping the economy “hostage” to elevated interest rates that could dampen demand due to risks “does not seem to be a rational stance,” he added.
“Shocks by their nature are unexpected in both their timing and impact. The best way to deal with it is to arrest it when it comes and make the economy more resilient for such possibilities,” Mr. Villanueva said.
“Preparation is done not through high rates but through measures that improve market efficiency such as diversification of supply sources, readiness to adjust tariffs and fees, and temporary cash subsidies.”
