Singapore bank hikes Philippines inflation forecast

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DBS Bank Ltd. of Singapore raised its inflation forecast for the Philippines this year to 3.7 percent from 3.3 percent previously, a development which could prompt the Bangko Sentral ng Pilipinas (BSP) to keep rates higher for longer.

In a note, DBS economist Radhika Rao said Philippine inflation would likely be driven by base effects and higher food prices in the coming months, which will push inflation to above the two to four percent target in the first half.

She also noted that there would be inflationary pressures from other non-food catalysts such as higher transport fares, higher electricity tariffs, spike in global oil prices and the implementation of a legislated increase in minimum wage.

'Factoring in these drivers, we revise our 2024 inflation forecast to 3.7 percent year on year,' Rao said.

Inflation averaged 3.3 percent from January to March, staying within the BSP's two to four percent target range, despite picking up for the second straight month in March to 3.7 percent from February's 3.4 percent.

Rao noted that while government measures have been in place to tame rising rice prices, including the long-term supply contract the country signed with Vietnam, the lagged impact of El Niño will keep prices of agricultural products high at least until July.

'Rising inflation and its impact on inflationary expectations, in the midst of a tight labor market, is likely to keep the BSP from loosening financial conditions this quarter and the next,' she said.

Earlier this month, the BSP's Monetary Board stood pat for a fourth straight meeting and kept its target reverse repurchase rate at 6.50 percent, the highest in nearly 17 years.

This was after the Monetary Board hiked borrowing costs by 450 basis points from May 2022 to October 2023.

A delayed rate cut cycle from the US Federal Reserve and the volatility in the foreign exchange market would also prompt the BSP to keep a defensive stance, Rao said.

'In all, domestic and global risks are likely to keep the central bank from front-loading policy easing. We see an extended pause and delay our rate cut expectations to the fourth quarter of 2024,' she added.

Ryota Abe, an economist from the Sumitomo Mitsui Banking Corp. (SMBC), said he expects the US Fed to only cut rates once this year and twice in 2025.

'Changes in the Fed's rate cut forecast have adverse impacts on the dollar-peso market. Given the current changes, my view now is that BSP may postpone its timing to cut rates to the August meeting or in the later meetings. In this case, rates will be reduced by 50 to 75 basis points in total,' he said.

After breaching to the 57:$1 level last April 16, the local currency continued to depreciate against the greenback, closing at 57.65 on Friday. This marked the weakest peso close since November 2022.

BSP Governor Eli Remolona Jr. has signaled that monetary authorities may delay rate cuts this year if risks to inflation continue to persist.

The BSP believes inflation could quicken to above the two to four percent target range over the next two quarters.

The Monetary Board will next meet on May 16 to discuss policy.