Japanese investment bank Nomura now expects inflation in the Philippines to breach five percent this year, surpassing the two to four percent target set by the Bangko Sentral ng Pilipinas (BSP), due to surging oil and food prices.
Nomura chief ASEAN economist Euben Paracuelles and analyst Rangga Cipta said the bank has raised its inflation forecasts to 5.1 percent instead of 4.6 percent for this year, and to 3.7 percent instead of 3.5 percent for next year.
“We also now see core inflation picking up, given the economic reopening and some signs of second-round effects, as well as wage increases,” they said in a commentary.
Inflation averaged 4.1 percent in the first five months after quickening to 5.4 percent in May from 4.9 percent in April.
Nomura sees continuity under the incoming administration of president-elect Ferdinand Marcos Jr. with the appointment of outgoing BSP Governor Benjamin Diokno as the incoming Finance secretary and Monetary Board Member Felipe Medalla as the incoming central bank governor.
“This implies policy normalization, which had already kicked off in May, will continue,” Nomura said.
Both Diokno and Medalla believe there is room to further raise the benchmark interest rate this year.
The BSP started its interest rate liftoff after delivering a 25 basis-point hike last May 19 to curb rising inflationary pressures. The central bank last raised interest rates in November 2018.
“However, given the trajectory of our inflation forecasts, we expect the policy rate to end the year at three percent before rising to 3.5 percent by the firt quarter of 2023. Still, we see some risk that the terminal rate could be lower than our forecast of 3.5 percent, if the new government were to follow a path of higher fiscal activism and promotes a more pro-growth policy mix,” Paracuelles and Cipta said.
On the fiscal side, Nomura sees the country’s budget deficit narrowing to 6.9 percent of gross domestic product (GDP) this year after swelling to 8.6 percent of GDP last year. This is better than the 7.6 percent target set by the Development Budget Coordination Committee (DBCC).
The Japanese investment bank maintained its GDP growth forecast at 6.7 percent, slightly lower than the revised DBCC target of seven to eight percent for this year.
“(This) reflects our more cautious view on the external environment; this includes the ongoing conflict in Ukraine and surging local inflation, which is likely to dampen consumer sentiment,” Paracuelles and Cipta added.
After exiting the pandemic-induced recession with a GDP growth of 5.7 percent last year from a contraction of 9.6 percent in 2020, the Philippines sustained the momentum with a stronger-than-expected expansion of 8.3 percent in the first quarter of the year.
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