BANKS have revised their inflation target for 2023, as November inflation drops again to 4.1 percent from 4.9 percent in October.
The Ayala-led Bank of the Philippine Islands (BPI) said it adjusted its full year inflation forecast to six percent in 2023 and 3.7 percent in 2024 given the improved November print.
The possibility of inflation falling below four percent in December is also substantial, BPI said, and barring the absence of major supply shocks, inflation may even reach three percent in the first three months of 2024.
However, it cautioned that inflation could potentially rebound to four percent or higher in the second quarter, especially if the impact of El Niño is worse than expected.
Rice concern
BPI said rice prices are likely to remain the primary factor contributing to inflation in the near future.
“Globally, the supply of rice is still a concern due to declining production in major exporting countries such as India. This makes the Philippines vulnerable to global conditions since the country imports 15 percent of its rice requirement in a normal year,” the bank warned.
November inflation eased as most commodity groups posted lower inflation readings relative to the previous month. Food inflation decelerated mainly due to the decline in vegetables inflation as well as the slower inflation for fish and sugar.
Non-food inflation also moderated as transport inflation decreased, reflecting lower domestic pump prices of petroleum products amid the downward trend in global oil prices.
Meanwhile, Ty-led Metrobank also revised its inflation forecast at six percent from 6.1 percent previously. It also forecasted the 2024 average inflation to settle at 4.3 percent from 4.6 percent previously, given the downtrend.
“The lower-than-expected annual inflation rate is reassuring as it is slowly approaching the Bangko Sentral ng Pilipinas’ (BSP) target range of two to four percent inflation,” Metrobank said.
It, however, warned that the presence of existing geopolitical conflicts and lingering supply constraints which could be exacerbated by the effects of El Niño until early next year may push prices up.
Moreover, despite the voluntary oil production cuts by Saudi Arabia and the war between Israel and Hamas, sluggish demand for oil, particularly in China, have kept prices subdued. But, this could be put to test once more, especially after the recent attacks by Yemen’s Houthi rebels on commercial vessels on the Red Sea, the bank said.
Price decreases in fuel over the last few weeks also trickled down into transportation costs, which dropped 0.8 percent from one percent in October 2023 and 12.3 percent in November 2022.
“Metrobank Research sees the above-target inflation to persist through 2024. We therefore expect the BSP to keep its hawkish bias until the latter half of next year,” it said.
Despite the improving outlook for inflation, BPI said it might be premature to expect rate cuts in the near future.
“The BSP might need to keep interest rates elevated for most of next year especially given the possibility of an inflation rebound in the second quarter of 2024,” it said.
Moreover, the rate cuts will also depend on what the Federal Reserve will do.
“It might be difficult to cut interest rates without any rate cuts from the Fed given the substantial current account deficit of the country, which could lead to volatility in the exchange rate,” BPI said.
The BSP maintained the interest rates at 6.50 percent during its Nov. 16 meeting. KOC