Economists forecast 3.7% inflation for 2024, rate cut in Q3

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Private sector economists forecast further easing in inflation this year to 3.7 percent based on the latest survey conducted by the central bank in May 2024 versus the 3.8 percent from the April tally.

Based on the latest Monetary Policy Report (MPR) of the Bangko Sentral ng Pilipinas (BSP), the preliminary results of the survey of external forecasters (BSEF) for May also showed that while analysts retained the 2025 inflation forecast of 3.5 percent, it raised the 2026 inflation expectation to 3.5 percent compared to the 3.4 percent from the April survey.

The survey conducted on May 9 to 15 which included 20 private sector analysts, likewise indicated that economists anticipate that the BSP will likely retain the current 6.5 percent policy rate in the second quarter.

Majority of the analysts expect policy settings to remain unchanged but “about the same number of respondents expect a 25-bp (basis point) cut in the policy rate during the period.” There is only one monetary policy meeting in the third quarter which will be in August.

By the end of 2024, economists see the BSP cutting the policy rate by 25 to 150 bps. This means they also expect the BSP to cut the key rate in November and December.

For 2025, economists think the central bank will further loosen its policy stance by a range of 25 to 250 bps.

For 2026, analysts also expect an additional reduction of about 50 to 150 bps in the policy rate.

As to the inflation path, analysts expect within-target inflation over the policy horizon but with lingering uncertainty, it could settle at the higher end of the two percent to four percent target because upside risks continue to dominate due mainly to supply chain disruptions.

The BSP said that generally, inflation expectations are still well-anchored.

However, the main upside risks to the inflation forecast are the following: elevated prices of basic goods (particularly oil and food, including rice) owing to supply-side pressures brought by the geopolitical conflict in the Middle East; adverse impact of El Niño; and potential negative effect of La Niña in the second half of the year.

Analysts also cited downside risks that will come from: easing albeit still elevated food and non-food inflation, such as rice and oil; and waning inflationary pressures on prices as El Niño and base effects weaken in the near term.

Meanwhile, the survey showed a 77.2 percent probability that inflation will settle within the two percent to four percent target range in 2024. Analysts also see a 22.8 percent probability that inflation will breach the upper end of the target range.

For 2025, there is an 85.3 percent chance that inflation will fall within the target band and for 2026, analysts predict a 73.5 percent probability it will settle within the target.

According to the BSP, “relative to the February 2024 MPR, the shape of the May 2024 BSEF’s probability distribution for analysts’ inflation forecasts for 2024 and 2025 has narrowed, implying an increased probability that inflation will settle within the 2-4 percent target band.”

“This could indicate a further anchoring of inflation expectations. The probability distribution during the February 2024 round showed a fatter distribution, suggesting heightened uncertainty as responses were more dispersed across various inflation outcomes,” added the BSP.

Since the risks to the inflation outlook continue to lean toward the upside, the BSP said potential price pressures are linked mainly to higher transport charges, food prices, electricity rates, and global oil prices.

For 2024 as of May 16, the BSP has lowered its risk-adjusted inflation forecast to 3.8 percent versus the previous April 8 policy meeting of four percent. Next year’s forecast is however the opposite, it was increased to 3.7 percent from 3.5 percent.

The reduction in the 2024 inflation risk-adjusted forecast is mainly due to impending higher transport charges, food prices and electricity rates. For 2025, the projection is adjusted higher primarily because of higher global oil prices and the movement of the exchange rate in the region where a strong US dollar persists.