By means of Luisa Maria Jacinta C. Jocson, Reporter
Headline inflation could fall to around 2% this year due to easing price pressures, analysts said, which would be well below the Bangko Sentral ng Pilipinas (BSP) projection.
“We maintain our forecast for consumer price index (CPI) inflation at an average of 2.7% in 2025, down from 3.2% in 2024, and below BSP’s baseline forecast of 3.3%,” Nomura Global said Markets Research analysts Euben Paracuelles and Nabila Amani. in a comment.
Inflation accelerated in December from 2.5% in November to 2.9% on an annual basis.
This brought full-year inflation to 3.2%, in line with the Bangko Sentral ng Pilipinas (BSP) forecast for 2024. It was also the first time that full-year inflation was within the central bank’s target from 2-4% since 2021, when inflation averaged 3.9%.
This year, the BSP expects inflation to average 3.3%. Taking the risks into account, inflation could reach 3.4%.
HSBC economist for ASEAN Aris D. Dacanay said he expects inflation to average 2.5% in 2025, citing the continued decline in rice prices.
“Nevertheless, we think the acceleration in inflation could be short-lived as downside risks to global oil prices persist while retail rice prices decline,” he said.
In December, rice inflation fell sharply to 0.8%, compared with 5.1% in November and 19.6% a year earlier.
Rice is one of the biggest drivers of inflation, but prices have fallen since the government cut import duties on rice to 15% from the previous 35% in July. This tariff regime will be in effect until 2028.
The Philippine Statistics Authority (PSA) has also raised the possibility of rice inflation turning negative this month.
“Importantly, the output gap remains negative, and we continue to expect the impact of lower rice import tariffs on food inflation to continue in the coming months,” Nomura said.
Nomura said inflation pressures appear to be “well under control” amid the government’s continued supply-side measures and its oil price assumptions.
“You also have the deflationary momentum of Chinese goods as trade is diverted. And at the same time, the risks for global energy prices are skewed to the downside,” Dacanay said.
“Because if Fed rates are high while growth in mainland China is weaker than before, demand for global energy, or at least for oil, will actually decline, causing energy prices to fall and inflation to decline.” , he added.
Meanwhile, Citi Philippines economist Nalin Chutchotham expects inflation to average 3.1% this year, still below the BSP’s forecast.
She said inflation will remain “well within the policy target” this year, despite upside risks from electricity tariff increases.
“We have revised inflation upwards for 2025 from 2.8% to 3.1% as a result of planned electricity tariff increases during the first half, also noting potential further adjustments in the remainder of the year, although this can be partially offset by potentially lower oil prices. Mrs Chutchotitham added.
With inflation expected to remain manageable, the BSP has room to continue the easing cycle.
“We see limited implications for our BSP forecasts due to the still favorable inflation outlook, which is the main policy driver for BSP despite a more aggressive Fed,” Nomura said.
The BSP initiated its rate cutting cycle in August last year, delivering a total of 75 basis points for 2024. This brought the benchmark rate to 5.75% by year-end.
“We have one more CPI print before the next BSP meeting, and unless we see another sharp rise in headline inflation to well above 3%, we see no reason for BSP to pause,” Nomura added.
Nomura expects the BSP to make a 75 basis point cut in its first three meetings this year.
“Despite currency weakness, the BSP may continue to cut rates and decouple from the Fed or regional peers given its assessment of well-anchored inflation expectations and limited currency pass-through,” it added.
The peso fell to a record low of P59 per dollar three times last year, twice in November and once in December.
Meanwhile, Mr Dacanay foresees a rate cut of up to 75 basis points in the third quarter, in steps of 25 basis points.
“We have updated our forecast for the policy rate and expect a more gradual easing cycle, in which the BSP – taking into account Fed moves and currency volatility – will cut in alternative rate meetings until the policy rate reaches 5% in the third quarter achieved,” he said. .
“However, we do not think the upward surprise in headline inflation will completely derail the outlook for policy rates. Looking under the hood, inflationary pressures appear to be short-lived,” he added.
BSP Governor Eli M. Remolona Jr. has said the central bank prefers to cut interest rates in “baby steps.”
“Current policy rates remain relatively high, and given the slowdown in monetary policy, we expect the BSP to continue its gradual 25 bp rate cuts in February, the second and third quarters,” Ms Chutchotitham said.
The BSP has reduced the number of Monetary Council meetings to six this year from seven previously, citing the need for deeper analysis of data.
“We expect inflation to likely track by 50 basis points in 2026 if inflation remains close to the target midpoint, bringing real policy rates closer to historical levels and continuing to support economic growth,” Ms Chutchotitham added.