Inflation rate starting in May is expected to hit above five percent and remain at that level for the rest of the year, while interest rates could rise further due to “extremely” high prices of oil and non-oil commodities, according to bank analysts.
Since inflation and the central bank policy rates are linked, the market also expect the Monetary Board of the Bangko Sentral ng Pilipinas (BSP) to continue raising benchmark rates to three percent flat until the third quarter this year.
“Amid extremely elevated crude oil, commodity, and even food prices pushing up inflation to above-5% (percent) levels, together with the (US) Fed’s accelerated hikes in policy rates, interest rates will likely continue to rise in Q2 (second quarter) and Q3 (third quarter),” according to economists in Metrobank-unit First Metro Investment Corp. and its research partner, University of Asia and the Pacific’s latest “Market Call” report.
The BSP hiked rates by 25 basis points (bps) last May 19 to 2.25 percent for the overnight reverse repurchase (RRP) facility. Another 25 bps rate increase to 2.50 percent is widely anticipated this month to contain an elevated inflation outlook. The BSP forecasts average inflation of 4.6 percent for 2022, above the target of two percent to four percent. In the first four months of the year, inflation rate averaged at 3.7 percent, but price pressures are not letting up, resulting to continued surges in the global prices of crude and other commodities.
Security Bank Corp. chief economist Robert Dan Roces on Friday, June 3, said May inflation will likely settle at 5.4 percent, higher than April’s 4.9 percent and March’s four percent. His forecast range is 5.1 percent to 5.7 percent which is a bit tighter than the BSP’s May inflation projection of five percent to 5.8 percent.
“With upside risks to local inflation, the US Fed's and other major central banks' policy adjustments, and the peso’s depreciation, the central bank is expected to act on another 25-bp rate hike this June 23 and 50-bps more in the second half, bringing the end of year policy rate to 3%,” said Roces.
The bank analyst added that “current estimates show that inflation remains mostly cost-push driven and may peak this quarter before easing at elevated levels of above four percent for the rest of the year.”
Meantime, FMIC-UA&P analysts expect inflation to average at 5.3 percent in the second quarter with international crude oil prices still above $100 per barrel. It said inflation will “slightly” increase in the second half of 2022 that “will constitute another push factor.”
FMIC-UA&P said the rising inflation “should average above 5% for the remaining months of 2022, unless we see a sudden end in the Russia-Ukraine war and sharply lower crude oil prices.”
“The war remains unpredictable, but the second-round effects of unusually elevated crude oil prices have affected other commodities. With higher inflation comes higher interest rates which impinges on spending by consumers and borrowing by firms,” it said.
Analysts added that with money supply growth “still very much at a single-digit pace” they also see that an “early tightening by the BSP may easily result in too tight a monetary situation that would aggravate the rise in interest rate.”
In the BSP’s latest Monetary Policy Report (MPR), inflation is expected to accelerate in the next quarters with the latest forecast path indicating that inflation could remain above the two percent to four percent target range until the first quarter next year and “peaking” in the second quarter this year at 5.1 percent.
Meantime, in the BSP’s May 2022 Private Sector Economists’ Inflation Forecasts, the 16 surveyed analysts raised their mean inflation forecast to 4.6 percent from its previous 4.1 percent in the April 2022 survey. For 2023 and 2024, forecasts were also higher at 3.6 percent from 3.4 percent, and 3.4 percent from 3.3 percent, respectively.
The economists’ 2022 inflation forecast is the same as the BSP’s while for 2023, it is lower than the central bank’s 3.9 percent projection.
The MPR noted that inflation will remain elevated at the five-percent level for the rest of the second half of this year.