The country’s above-target inflation is expected to ease to below six percent within the first three months of 2023 as the oil market holds steady and tempers its impact on non-oil commodities.
“We expect it (inflation) to significantly ease to below 6% by Q1-2023 (first quarter) as food and crude oil prices stabilize,” according to Metrobank affiliate, First Metro Investment Corp. (FMIC) and its research partner, University of Asia and the Pacific (UA&P).
FMIC-UA&P analysts expect inflation to average 5.7 percent this year, lower compared to the Bangko Sentral ng Pilipinas’ (BSP) estimate of 5.8 percent. As of end-October, inflation rate averaged at 5.7 percent.
“Inflation will remain elevated, above 7% YoY (year-on-year) in the last two months of the year, to average 5.7% for the full year,” said FMIC-UA&P in its latest “Market Call” report.
While the BSP expects inflation to average at 5.8 percent for 2022, it sees a lower 4.3 percent average for 2023 and 3.1 percent for 2024. The 2022 and 2023 forecasts are still above the government target range of two percent to four percent;
In October, inflation increased to a 14-year high of 7.7 percent. It was a significant jump from 6.9 percent in September. The BSP still expects inflation to peak in November and December but will not likely exceed eight percent.
Meantime, FMIC-UA&P said the peso vis-à-vis the US dollar will stay below P57 especially in December when remittances are strong. The BSP’s signalling of more rate hikes for November and December will also add to the strength of the peso.
The peso appreciated back to the P56 level on Nov. 23, the first time it was back at this rate since early July this year. The peso hit its lowest record rate of P59 last Sept. 29.
The tamer US inflation and possible lower rate hikes by the US Federal Reserve is contributing to the softening of the US dollar.
Based on the BSP’s survey of private sector economists, analysts anticipate the BSP to further tighten monetary policy settings by 75 basis points (bps) to as much as 150 bps for the remainder of the year. This was before the Nov. 17 rate increase of 50 bps.
Since May this year, the Monetary Board has raised the key rate by a total 300 bps. The last rate hike of 50 bps brought the policy rate to five percent.
For next year, the BSP said most analysts expect a follow-through policy rate hike by about 25 bps to 75 bps, while a reversal is anticipated in 2024 ranging from 25 bps to 150 bps.
Based on the November Monetary Policy Report, the BSP forecasts inflation will remain above-the-target until the second quarter of 2023.
Inflation is expected to decelerate back to within the target range by the third quarter next year and “approach the low end of the target range in Q4 (fourth quarter) 2023 to Q1 2024 due to negative base effects, and eventually stabilize at the midpoint of the target by Q2 2024”
The MPR noted that upside risks to the inflation outlook will continue in 2023, but will be broadly balanced in 2024.
The major upside risks are listed as: the potential impact of higher fertilizer prices; trade restrictions and adverse global weather conditions on international food prices; increased prices of fruits and vegetables owing to domestic weather disturbances; petitions for tricycle fare hikes due to elevated oil prices; higher sugar prices; and the possible reinstatement of the full tariff rates on several imports such as pork and rice that were temporarily lowered under Executive Order No. 171.
The main downside risk, meantime, is the impact of a weaker-than-expected global output recovery.
The MPR also noted that based on the November survey of private sector economists, inflation expectations will rise further and could “remain at risk of disanchoring.”
Private sector economists expect a higher mean inflation of 5.9 percent by the end of 2022, up from its previous forecast of 5.7 percent in October.
For 2023 and 2024, surveyed analysts also raised their estimates to 4.9 percent from 4.6 percent, and four percent from 3.8 percent, respectively.
For the 22 surveyed analysts, the risks to the inflation outlook tilted to the upside due to lingering inflationary pressures brought on by weather disturbances, global supply chain disruptions, Covid-19 pandemic, weaker peso against the US dollar, and second-round effects, said the BSP.