The Bangko Sentral ng Pilipinas (BSP) is considering announcing not one, but two inflation projections on a monthly basis as well as the yearly average that they release after each Monetary Board policy meetings, as inflation pressures become more persistent and threatening inflation expectations.
BSP Deputy Governor Francisco G. Dakila Jr. said they are thinking of releasing the baseline inflation forecasts and a risk-adjusted inflation projections at the same time to have a more accurate reading of the country’s still elevated inflation outlook.
When asked if the BSP will do this monthly, he said “that’s still under discussion.”
“But in this circumstance, in terms of guiding (or) communicating the possible outturns (based on the BSP inflation charts) the weight is now predominantly on the upside which is why we’re focusing on the risk-adjusted forecast,” said Dakila Thursday, which is the day the Monetary Board met for the 7th time this year to discuss the policy rate. The last Monetary Board policy meeting for 2023 is on Dec. 14.
On Nov. 16, the BSP decided to hold its key rate steady at 6.5 percent. This is after an off-cycle rate hike of 25 basis points last Oct. 26 to prevent the inflation outlook from being disanchored further from the two percent to four percent three-year target.
The BSP for the first time released two inflation forecasts this week, the baseline which is the traditionally announced numbers, and the risk-adjusted forecasts.
The risk-adjusted inflation is equivalent to the baseline inflation forecast plus the probability weighted impact of the different upside and downside risks to the inflation outlook. The risk-adjusted inflation forecasts are higher than the baseline forecasts.
“In coming up with a baseline forecast, we base the forecasts on futures prices of oil as they appear in the market. But there are scenarios that could lead to that outturn not being realized. In the risk-adjusted forecast, for example, we look at what would happen if there is an escalation of the conflict between Israel and Hamas. So with that, we’re looking at oil prices that could be higher than what are included in the baseline,” said Dakila.
Inflation-targeting BSP
The BSP may have decided to reveal its risk-adjusted inflation forecasts now after it missed its October inflation projection and when it did not raise the policy rate on Sept. 21 during a scheduled policy meeting, but increased the key overnight rate on Oct. 26 in a regular Monetary Board meeting.
BSP Governor Eli M. Remolona Jr. was candid enough to say that they did not see how much inflation expectations were veering away from the targeted path, hence, the need to execute an off-cycle rate hike on Oct. 26, way ahead of the Nov. 16 policy meeting.
Before the release of the October inflation, the BSP announced a forecast range of 5.1 percent to 5.9 percent versus September’s actual inflation rate of 6.1 percent. It turned out the October inflation was much lower at 4.9 percent.
In coming up with a risk-adjusted inflation forecast, Dakila said "we look at the risks (as listed) and then there’s a judgment on what is the possibility (or) how probable are these risks. And then we make an adjustment. We have an estimate of the impact and combined impact of the scenarios that we’re looking at (and the result is) the risk-adjusted forecasts.”
Dakila did not reply when asked if the risk-adjusted forecasts is more accurate than baseline forecasts since he noted “various possible outcomes on the path of inflation” that would make this perhaps an unanswerable question.
For now, with inflation very much skewed on the upside because risks predominate on the upside, the BSP is more comfortable with a risk-adjusted inflation forecasts.
But despite a higher risk-adjusted inflation forecasts versus the baseline forecasts, Dakila said the latest projections still “indicate that the inflation outlook has moderated over the policy horizon.”
“Guided by incoming data, the BSP remains prepared to resume monetary policy tightening as necessary to steer inflation towards a target-consistent path, in line with its price stability mandate,” he added.
For 2023, the BSP’s risk-adjusted inflation forecast is 6.1 percent, lower than the 6.2 percent estimate given last Oct. 26.
For 2024, the risk-adjusted forecast is 4.4 percent, also lower compared to 4.7 percent last Oct. 26, while the projection for 2025 is 3.4 percent from 3.5 percent previously.
Comparably, the baseline forecast for 2023 is now at six percent versus the Sept. 21 estimate of 5.8 percent, while for next year, the baseline forecast is 3.7 percent from 3.5 percent previously. For 2025, the BSP still forecasts 3.4 percent inflation.
"Accurate, unbiased" forecasts
The BSP considers its inflation-targeting ability and forecasting methods as credible and accurate. It believes that its forecasting performance is generally “accurate, unbiased and efficient” during the last 12 years, and even outperforming forecasts from the private sector.
To emphasize its good track record, the BSP did an evaluation report of its forecasting actions for the period 2010 to 2022.
Based on this report which was released mid-2023, the BSP considers both its monthly and annual inflation forecasting performance as better than most, including that of the International Monetary Fund and private sector economists.
For the month-ahead inflation forecast for example, from 2010 to 2022 the BSP correctly predicted that actual inflation will settle within the forecast range 143 times out of 155 months, or a batting average of 92.3 percent.
The report also noted that 11 out of 11 month-ahead inflation forecasts in 2022 were within the forecast range announced by the BSP, which is usually the last working day of a given month.
Meanwhile, forecasting errors or the mean absolute error (MAE) from the month-ahead forecasts in 2022 were lower compared to the historical average.
Last year, the BSP said the MAE of the median and average inflation forecasts for the BSP was 0.17 percentage point (ppt) compared to Bloomberg’s 0.20 ppt.
The BSP’s month-ahead forecast errors had a 0.20 ppt historical average since 2010.
The BSP also noted that the MAE of its one-month ahead inflation forecasts “has consistently declined since 2010, although it has risen to levels above the historical average in the years 2018, 2020, and 2021.”
As for the BSP’s annual inflation forecasts, in 2022 the forecasts were lower compared to the actual average. The annual inflation estimates are released eight times to the public after each Monetary Board policy meeting in a given year.
To improve its forecasting performance, the BSP since last year has intensified efforts to acquire real-time information for it to identify emerging risks across different sectors.
They developed and continue to develop new tools such as machine learning methods to analyze non-traditional data such as internet searches, newspaper articles, and social media posts, it said.