Economists raise 2021 inflation forecasts

Published January 23, 2021, 7:00 AM

by Lee C. Chipongian

Economists surveyed by the Bangko Sentral ng Pilipinas (BSP) have adjusted its inflation expectation higher for 2021 but steady for 2022, while the BSP continue to communicate its intention to maintain low borrowing rates.

Based on the central bank’s latest Private Sector Economists’ Inflation Forecasts (December 2020), analysts expect inflation for this year to increase to 2.9 percent from 2020’s actual 2.6 percent average. This is a higher forecast from its end-September 2020 estimate of 2.8 percent, but still lower compared to BSP’s own 3.2 percent forecast for 2021.


For 2022, economists still see a mean inflation forecast of a flat three percent which is higher than BSP’s estimate of 2.9 percent. The BSP and the 24 private sector economists surveyed agreed though, that inflation rate will remain manageable for the next two years at least and will likely settle within the two-four percent target.

 “The BSP sees ample room to maintain its accommodative monetary policy stance in 2021 on the back of a benign inflation outlook and well-anchored inflation expectations,” according to BSP Governor-in-charge, Deputy Governor Francisco G. Dakila Jr.

Dakila noted that BSP’s baseline projections of 3.2 percent for 2021 and 2.9 percent for 2022 remain appropriate despite recent increase in inflation with December 2020 at 3.5 percent, up from 3.3 percent previously.

 “The recent uptrend in inflation is seen to be largely transitory, reflecting the short-term impact of recent typhoons,” Dakila reiterated. “The overall balance of risks to future inflation continues to lean toward the downside owing mainly to the slow recovery of demand and risk of potentially deeper disruptions to economic activity caused by the pandemic. However, upside inflation risks are also a possibility due to supply-side risks such as weather disturbances and rising crude oil prices.”

The BSP said analysts also expect inflation to remain benign in the near term, with risks to the inflation outlook tilted to the upside as the economy gradually reopens.

The survey identified upside risks to inflation such as: food supply disruptions due to the recent typhoons and the likely occurrence of weather disturbances in the near term amid La Niña condition; the rebound in oil prices on the possible recovery of demand; higher consumer spending during the holiday season; and  the impact of the BSP’s monetary policy actions.

The downside risks, in the meantime, are the following: muted domestic demand as consumer confidence remains weak and low purchasing power amid high unemployment rate; strong peso against the US dollar; and soft global crude oil prices.

 “Based on the probability distribution of the forecasts provided by 20 out of 24 respondents, there is a 92.1-percent probability that average inflation for 2020 will settle between the two-four percent range, while there is a four percent chance that inflation will fall below two percent,” the BSP said.

The probabilities that inflation will keep within the two-four percent target band in 2021 is 91 percent, and 91.5 percent for 2022, according to the survey.

Last year, the Monetary Board cut the benchmark rate by 200 basis points to two percent. “This was possible because of the benign inflation outlook even as adverse weather conditions and supply distribution bottlenecks pushed food prices higher during the quarter,” said Dakila.