PRIVATE SECTOR economists kept their inflation outlook for this year but cut their forecasts for 2024 and 2025, the Bangko Sentral ng Pilipinas (BSP) said.
However, analysts said the threat of El Niño, the impact of trade restrictions on food items, oil production cuts, and hikes on transport fare and wages pose risks to the inflation outlook.
Based on the results of the BSP’s survey of private economists in August, analysts’ average inflation forecast for 2023 was at 5.5%, unchanged from the July survey.
For 2024, the analysts’ mean inflation forecast was trimmed to 3.5%, from 3.6% previously, while the projection for 2025 was also cut to 3.4% from 3.6%.
“Analysts expect inflation to continue easing in the near term owing largely to negative base effects,” the BSP said. “Risks to the inflation outlook, however, remain tilted to the upside due mainly to supply disruptions, particularly the potential adverse impact of El Niño.”
On Thursday, the BSP raised its average inflation forecast for 2023 to 5.6% (from 5.4% previously) and 3.3% (from 2.9%) for 2024, respectively. It also hiked its 2025 inflation forecast to 3.4% from 3.2%.
According to the central bank, analysts cited the higher prices of basic commodity items and services due to weather disturbances and the El Niño phenomenon as a key upside risk to inflation.
The El Niño weather event will likely persist in the Philippines until the second quarter next year, based on the latest advisory from the state weather agency.
This increases the chance of below-normal rainfall conditions, which could lead to dry spells and droughts in some areas of the country and in turn, dampen water resources and agricultural productivity.
“Electricity rates could rise in the fourth quarter of 2023 to second quarter of 2024 owing mainly to the warm and dry weather condition associated with El Niño,” the BSP said.
“A substantial increase in demand for power which could not be supported by power supply reserves could lead to a declaration of yellow or red alerts in the transmission grids, resulting in higher generation charges from the Wholesale Electricity Spot Market (WESM) and independent power producers (IPPs),” it added.
Local distribution utilities may also have to tap more expensive power generation sources as an alternative to hydropower plants, the BSP said.
The impact of trade restrictions on food items as well as oil production cuts by the Organization of the Petroleum Exporting Countries and its allies may also affect inflation in the Philippines.
India’s decision to restrict rice exports of non-basmati and broken white grain has pushed global rice prices higher.
The BSP said second-round effects from higher transport fares and wage hikes may also put pressure on inflation.
Transport groups are requesting for a P2 increase in public transport services nationwide, while a P40 wage hike in the National Capital Region (NCR) took effect on July 16. Pending wage hike petitions for various provinces in the country will likely be decided on by September.
“The main downside risk cited by a few analysts include the lagged effect of the BSP’s successive monetary policy tightening, which is expected to temper inflation,” the central bank said.
The BSP kept benchmark interest rates steady for a third straight meeting last week, but signaled it is prepared to resume tightening if needed amid risks to inflation.
The Monetary Board left its overnight reverse repurchase rate unchanged at a near 16-year high of 6.25%. Interest rates on the overnight deposit and lending facilities were maintained at 5.75% and 6.75%, respectively.
The BSP has raised borrowing costs by 425 basis points (bps) from May 2022 to March 2023 to tame inflation.
The central bank also said most analysts forecast the BSP to extend its policy pause for the rest of the year.
“However, some analysts are looking at one last rate increase by 25 bps in the third quarter and a possible reversal by 25 bps in the fourth quarter,” it said.
For 2024, all analysts expect the BSP to cut the key policy rate by a range of 50 bps to 225 bps. They also anticipate further cuts of 25 bps to 200 bps in 2025.
Meanwhile, all economists expect full-year inflation in 2023 to breach the 2-4% target. For 2024 and 2025, most analysts see inflation decelerating within the target range.
Analysts assigned a narrow 1.7% probability (from 2.8% a month ago) that inflation this year will settle within the target range, while there is a 98.3% chance (from 97.2%) it will exceed 2-4%.
The likelihood of inflation falling within the target band next year increased to 80.5% (from 76.7%), while the probability of inflation settling within 2-4% in 2025 is at 77.5% (from 71.6% previously).
There were 26 respondents in the BSP’s survey of private sector economists, which was conducted from Aug. 5 to Aug. 9. — Keisha B. Ta-asan