Private sector economists expect inflation to be mostly manageable this year at 3.9 percent but raised its 2025 forecast to 3.5 percent from its previous 3.4 percent due to upside price pressures and possible second-order shocks.

Based on the February 2024 BSP Survey of External Forecasters (BSEF) released on Feb. 16, previous forecasts for 2024 and 2026 were maintained while the mean inflation projection for 2025 increased slightly.

For this year, economists kept its previous mean inflation forecasts (January 2024) of 3.9 percent and 3.4 percent for 2026 since they think inflation will continue to be manageable and will settle within the target range of two percent to four percent despite upside pressures from supply-side issues.

The results of the BSEF mirror the BSP’s risk-adjusted inflation forecast for 2024 of 3.9 percent and 3.5 percent for 2025. The BSP announced the latest forecasts last Thursday, when it also announced an unchanged benchmark rate of 6.5 percent after its first policy meeting for the year.

Based on the latest Monetary Policy Report (MPR), the BSP forecast path “is driven by the lower-than-expected inflation outturns, peso appreciation, and lower global crude oil prices.” This was partly offset by higher assumptions for global non-oil prices, stronger domestic growth outlook, impact of El Niño weather conditions, and minimum wage adjustments in areas outside of the National Capital Region, it added.

“Analysts expect inflation to remain manageable this year and settle within the target range. However, risks to the inflation outlook continue to be dominated by upside pressures owing to supply-side shocks and second-round effects. The upside risks to inflation are seen to emanate mainly from the potential rise in basic goods (particularly oil and food, including rice) and services (e.g., restaurants and accommodation services) owing to supply-side pressures attributed mainly to the adverse impact of El Niño and geopolitical conflicts in the Middle East and Red Sea,” said the BSP.

The central bank said the survey continued to point to second-round effects from wage adjustments and higher electricity rates, as well as positive base effects as upside risks.

Meanwhile, the downside risks to the inflation outlook are: continued deceleration of food and non-food inflation, including oil; implementation of non-monetary government interventions such as Executive Order No. 50 which lowers the import tariff of key food items, including rice; and the subdued global demand as possible downside risks to inflation.

The BSP said that based on the probability distribution of the forecasts from by 17 out of 24 surveyed analysts, there is a 68.2-percent probability that inflation will stay below four percent in 2024. There is also a 31 percent chance that inflation will breach the upper end of the target band.

For 2025, there is a much higher probability or about 78 percent that inflation will settle within the target while for 2026, it stands more of a chance at 82.9 percent that will keep within the target range of two percent to four percent.

Stable policy rate

The BSP noted that majority of the analysts anticipate that the Monetary Board, BSP’s policy-making arm, will keep the current policy setting on hold until the second half of 2024. This means the target reverse repurchase (RRP) rate or the policy rate will remain at 6.5 percent for some time.

The consensus from the survey is that the BSP will start reducing the RRP rate in the second half of the year by 50 basis points (bps) to 125 bps.

For 2025, the BSP is seen to further loosen its policy stance by a range of 25 bps to 300 bps, said the BSP.

Last week, the BSP did not derail from market expectations and left the key rate intact. BSP Governor Eli M. Remolona Jr. himself has earlier signaled to the market that there will be no rate movement this month.

The BSP said risks to the inflation outlook are still persistently on the upside such as higher transport charges; increased electricity rates; higher oil and domestic food prices; and the additional impact on food prices of a strong El Niño episode.

However, BSP officials also noted that the recent agreement with Vietnam to secure rice supply for the country in the next five years is encouraging and will impact on rice prices.

As for the exchange rate and the economy, the BSP has the same exchange rate assumption as the government of P55 to P58 to a US dollar for this year, but did not disclose its point or single rate for the peso that it uses in making policy decisions.

The BSP also has a lower gross domestic product (GDP) growth assumption compared to the 6.5 percent to 7.5 percent target of the Development Budget Coordinating Committee.

The central bank said this year’s growth will be affected by BSP’s cumulative rate increases since May 2022 of 450 bps. This was based on recent indicators that economic activity could moderate in the near term as the full impact of the BSP rate hikes manifest.