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Inflation seen slowing to 3.4% in Q4

In spite of the raised projections, the Bangko Sentral ng Pilipinas (BSP) sees inflation slowing down and approaching the central point of the target in the last quarter of this year.

In the August Monetary Policy Report, the central bank said that inflation is projected to slow down in the fourth quarter of 2023, reaching 3.4 percent on a quarterly basis.

It is expected to gradually approach the lower limit of the target, reaching 2.4 percent in the first quarter of 2024.

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"Estimated negative base effects until January 2024 will be favorable for the inflation path," the central bank said in a statement. "This can be attributed primarily to the normalization of global commodity prices after the sharp uptick in March 2022."

However, the BSP anticipates inflation will pick up pace in the second to third quarter of 2024, reaching approximately 3.6 percent and 3.7 percent, respectively, which is closer to the upper band of the target range.

This increase is attributed to positive base effects, elevated crude oil costs, and the delayed influence of minimum wage changes. Eventually, by 2025, inflation is expected to stabilize just above the midpoint of the targeted range.

"Base effects are estimated to turn positive from February to July 2024," the central bank said.

Inflation slowed to 4.7 percent in July after reaching an unforeseen 14-year peak of 8.7 percent in January.

Although inflation is currently decreasing, the Monetary Board has revised its 2023 inflation projection to 5.6 percent from the initial 5.5 percent.

The forecasts for the following year and 2025 have also been revised to 3.3 and 3.4 percent from the original figures of 2.8 percent and 3.2 percent, respectively.

BSP Governor Eli Remolona said that the balance of risks to the inflation forecast remains largely tilted to the upside.

"The potential impact of additional transport charges, higher domestic prices of key food items facing ongoing supply constraints, a higher-than-expected minimum wage adjustment in areas outside the NCR (National Capital Region), the impact of El Niño weather conditions on food prices and utility rates, and higher electricity rates are the major upside risks to the inflation outlook," the BSP said.

Inflation survey findings

Meanwhile, in the latest survey conducted by the central bank in August 2023, private-sector economists maintained their prediction of 5.5 percent as the average inflation rate for the year 2023, consistent with the findings of the previous month's survey.

Moreover, the projections for the years 2024 and 2025 indicated a decrease, with the mean inflation forecast for 2024 dropping from 3.6 percent to 3.5 percent and for 2025 declining from 3.6 percent to 3.4 percent.

Analysts predict that inflation will likely keep decreasing in the coming months, primarily due to the influence of unfavorable base effects.

However, they noted that prospects for inflation could still lean toward an increase due mainly to disruptions in the supply chain, especially the possible adverse consequences of El Niño.

Based on the probability distribution of forecasts given by 22 out of 26 participants, analysts attributed a slim probability of 1.7 percent, down from 2.8 percent, that the average inflation for 2023 will fall within the range of 2.0 to 4.0 percent.

Conversely, there is now a significantly higher confidence level, at 98.3 percent, up from 97.2 percent a month earlier, that inflation will surpass the 4 percent mark.

Meanwhile, the probability of inflation aligning with the target range for 2024 has risen to 80.5 percent, up from 76.7 percent, while the likelihood of inflation comfortably staying within the target range for 2025 has increased to 77.5 percent from 71.6 percent.

The consensus among most analysts is that the central bank will likely halt its process of raising interest rates for the remainder of this year.

However, a few analysts are considering the likelihood of a final 25-basis-point rate hike in the third quarter of 2023, followed by a potential 25-basis-point reversal in the fourth quarter of the same year.

As for the outlook in 2024, all analysts foresee the central bank opting for a reduction in the main policy rate, with the range spanning from 50 to 225 basis points.

Moreover, there is an expectation of further easing, ranging from 25 to 200 basis points, throughout the year 2025.

For the third consecutive time this August, monetary policymakers have opted to keep interest rates steady at 6.25 percent. This decision comes as the latest underlying predictions suggest a return to the desired inflation rate by the fourth quarter of 2023.

During the previous March meeting, the Monetary Board implemented a small 25-basis-point rise. This move led to a total increase of 425 basis points since May of the prior year, reaching its highest point in nearly 16 years.

"All respondent analysts expect inflation to breach the upper end of the government's 2- to 4-percent target range in 2023," the central bank said. "For 2024 and 2025, most analysts are expecting inflation to decelerate to within the 2- to 4-percent target range."

Source: Manila Times

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