By Lee C. Chipongian
Private sector economists polled by the central bank raised their inflation estimates for 2018 until 2020 due to continued elevated inflation expectations, but most were optimistic of easing price pressures if government will not delay anti-inflation measures.
Based on the Bangko Sentral ng Pilipinas’ (BSP) Private Sector Economists Survey for the third quarter – a crucial period as far as BSP’s forecasting credibility is concerned – mean inflation forecasts for 2018 is now at 5.3 percent, 4.3 percent for 2019, and 3.9 percent for 2020. Except for the 2020 projection, all forecasts breached the two-four percent BSP target.
All estimates are higher than the previous survey’s 4.5 percent for this year, and 3.8 percent for 2019 and 2020 (based on the June or second quarter survey). Upside risks to inflation continue to be the higher and volatile global oil prices and the weaker peso, among other things.
BSP Deputy Governor Maria Almasara Cyd Tuaño-Amador said high inflation continue to be driven mainly by supply side factors as reflected in the uptick in food and energy prices while demand side pressures have become more apparent. “Analysts’ inflation expectations remain elevated in the third quarter (and they) attributed their projections to higher and more volatile global oil prices, increasing utility rates and higher transport fares and wages,” she said during the release of the quarterly inflation review.
Tuaño-Amador said the BSP expects price pressures to breach the target range in 2019 but that the timely implementation of non-monetary measures could still pull back inflation to settle within the two-four percent government target. The BSP forecasts 2018 inflation of 5.2 percent, 4.3 percent for next year and 3.2 percent for 2020.
BSP Assistant Governor Francisco G. Dakila Jr. said that global oil prices, for one, has a huge pull on price pressures but even this could be tamed given the government’s anti-inflation measures such as the rice tariffication.
One of the basis for the BSP’s most recent 50 basis points (bps) rate hike last month – for a cumulative 150 bps since May – and in raising inflation forecasts to 5.2 percent for this year is their Dubai crude assumption of $71.52/barrel for 2018, $74.14 for 2019 and $70.55 for 2020.
“In our simulations, if crude prices were to rise to $80/barrel, sustained all throughout the policy horizon, then inflation for 2019 inflation could rise by 21 bps. That is the rough assessment of the sensitivity of inflation to oil prices,” explained Dakila.
In which case he said the baseline 2019 forecasts will increase to 4.5 percent from its current 4.3 percent estimate. But, he added, the immediate implementation of the rice tariffication system by the end of this year will lower inflation rate by 0.7 percentage point. “So, even if we have a baseline of 4.5 percent (for 2019) at $80/barrel, minus 0.7 ppt, it will still give us some comfort in saying that the inflation target in 2019 could still be achievable.”
BSP Department of Economic Research OIC Dennis Bautista, in the meantime, said that in further calculating oil prices’ impact on inflation, they normally see a $1/barrel increase to Dubai crude as translating to an increase of 0.03 percentage point to inflation.
Based on the BSP survey, analysts noted that risks to inflation in 2018 remain tilted to the upside and – other than higher and volatile global oil prices – possible upside risks are: Impact of the implementation of Republic Act No. 10963 or the Tax Reform for Acceleration and Inclusion (TRAIN) law on the prices of domestic goods; weakening peso; rise in the prices of food and other commodities due to adverse weather conditions and supply shortage; and higher utility rates.
Analysts also continue to be concerned about any rise in wages and transport fares, strong domestic demand during the holiday season and due to the upcoming election, and the delay in the implementation of the government’s mitigating measures against rising inflation. They also see the higher government spending on infrastructure, global trade war, and higher inflation expectations as closely-watched price uptick triggers.
On the other hand, the key downside risks to inflation includes fiscal policy actions or mitigating measures such as the rice tariffication, Pantawid Pasada program, and unconditional cash transfers, according to the BSP. It also said that the recent and expectations of further policy rate hikes by the BSP and slower global growth are downside risks factors.
The BSP also noted that analysts anticipate inflation to moderate in 2019 and 2020 as the impact of TRAIN tapers off, global oil prices stabilize, and the government implements mitigating measures to temper inflation. “However, analysts are also watchful of potential inflationary pressures from a possible RR (reserve requirement) reduction and the implementation of Package 2 of the TRAIN law.”
The survey, which was participated in by 28 economists, said that 24 out of 28 analysts think there was a 0.5 percent probability that average inflation for 2018 will settle between the two-four percent target range, while there was a 99.5 percent chance that inflation will rise beyond four percent. For 2019, a higher probability of 30.2 percent noted that inflation will fall within the target range and 69.5 percent chance that inflation will breach the upper end of the target.