Analysts forecast lower inflation for next 3 years

By Lee C. Chipongian

Economists polled by the Bangko Sentral ng Pilipinas (BSP) said inflation forecasts will stick to below the four percent level this year until 2021 with downward pressures overshadowing risks to inflation.

MB file photo. MB file photo.

In its latest BSP Private Sector Economists Survey for end-first quarter, the market’s inflation expectations for this year have dropped to 3.3 percent from 4.1 percent in the December 2018 survey.

The survey showed lower forecast for 2020 at 3.4 percent from the previous estimate of 3.8 percent, while for 2021 the mean inflation forecast was also 3.4 percent.

Based on the central bank’s first quarter inflation report, analysts expect inflation in 2019 and 2020 to settle within the target range of two-four percent, with downward pressures for the most part controlling risks to prices’ outlook.

“Possible downside risks to inflation include the implementation of the rice tariffication law, which is expected to improve domestic rice supply and stabilize prices, and lower global crude oil prices,” according to BSP in assessing survey results.

“On the other hand, the key upside risks to inflation are seen to emanate from adverse weather conditions such as El Niño (and) the volatile global oil prices and foreign exchange market,” the report said. Higher domestic demand because of May election-related spending, and higher electricity rates were also cited.

The BSP’s possible policy rate cut this year is also one of the upside risks. The Monetary Board raised overnight benchmark rates last year by a total 175 basis points to curb high inflation, which peaked at 6.7 percent in September and October.

BSP Governor Benjamin E. Diokno, who has stayed off the grid while learning the ropes as BSP’s fifth governor, said in his opening remarks during the inflation briefing Friday that market inflation expectation mirrors BSP’s own inflation expectation.

“Consistent with (inflation turnout which was lower) inflation expectations of private sector economists are lower and aligned to the inflation target. Analysts expect inflation in 2019 and 2020 to settle within the target range, with downward pressures seen to dominate the risks to the inflation outlook,” said Diokno.

The BSP private sector’s survey included 25 banks and one stockbrokerage and research firm. The survey was conducted from March 11 to 15.

Based on the probability distribution of the forecasts provided by 21 out of 26 respondents to the survey, the BSP said there is an 81-percent probability that average inflation for 2019 will settle between the two-four percent target range.

The survey also said that there is 16.1 percent chance that inflation will “rise beyond four percent.”

For next year, analysts think there is a 79.8 percent probability that inflation will remain with the government target range, but there is also a 17 percent chance it will breach the upper end of the two-four percent target.

The BSP has been saying that while inflation expectations are becoming firmer, upside pressures could get worse because of the dry spell and possible prolonged drought to some areas, and volatile oil prices.

Inflation has dropped to 3.8 percent in the first quarter this year from 5.9 percent in the previous quarter. March inflation fell to 3.3 percent from 3.8 percent in February and 4.4 percent in January.

BSP Deputy Governor Diwa C. Guinigundo has said that the latest inflation outturn was “very much consistent” with the BSP’s forecast for March and the actual number “confirms the BSP’s view that inflation will sustain the downtrend for the rest of the year.”

“Month on month, price movement is zero with seasonal factors but deseasonalized series shows 0.1 percent, all indicative of the disinflationary process we are witnessing today. Core inflation as a measure of underlying demand pressure has also slowed down,” Guinigundo said.

The BSP has lowered its 2019 inflation forecast to three percent as of March 21, from the previous estimate of 3.1 percent announced last February 7. The BSP’s 2020 inflation forecast is also three percent.