Hongkong and Shanghai Banking Corp. raised on Thursday its full-year 2023 inflation forecast for the Philippines to 5.7 percent from 5 percent previously, taking into account the 8.7-percent print in January that indicated inflation had not peaked yet.
HSBC economist for ASEAN Aris Dacanay said the Bangko Sentral ng Pilipinas was also expected to raise the policy interest rates next week by 50 basis points, larger than the previous estimate of 25 bps, to rein in inflation.
“We raise our policy rate forecast and, at the same time, expect Bangko Sentral ng Pilipinas to maintain its aggressive rate hiking position a little longer—delivering a 50bp [previously 25bp] hike at next week’s rate setting meeting,” Dacanay said in a report. This would bring the overnight reverse repurchase rate to 6 percent.
“The January CPI numbers were eye-watering. The majority of the economists surveyed by Bloomberg, including HSBC, expected inflation to peak in December and show the first signs of easing in January 2023. However, the year started badly. Headline inflation accelerated to 8.7 percent y-o-y, beating market consensus by a full percentage point,” Dacanay said.
He said the previous causes behind inflation were still present. Supply-constraints in food, particularly sugar and vegetables, remained problematic. He said the initial surge in inflation last year spilled over other sub-commodity baskets.
“However, new causes have also emerged. Water and electricity rates were hiked, perhaps to make up for the losses incurred from the volatility in the PHP [Philippine peso] and the higher input costs incurred back in mid-2022. Rent CPI, which is a heavily weighted sub-commodity at 12 percent, accelerated to 5.0 percent y-o-y from 4.1 percent last month,” he said.
“The big upside surprise in January has set the tone for the inflation outlook for the rest of the year. We therefore raise our 2023 inflation forecast to 5.7 percent from 5.0 percent, but our 2024 forecast remains unchanged at 3.6 percent,” he said.
Dacanay said all these numbers suggested that the policy rate outlook was more than just following the Fed in lock step, but was also about the Philippines facing an inflation problem of its own.
“Supply constraints are posing a risk of rising inflation expectations, while demand from the country’s economic ‘re-opening’ remains strong. To put this in perspective, GDP in 4Q22 grew above expectations at 7.2 percent y-o-y despite a 14-year high inflation taking hold of the economy. This brought full-year 2022 GDP growth to 7.6 percent. Not only did this go beyond the 2022 government target of 6.5-7.5 percent, it was also the fastest growth recorded over the past 46 years,” he said.
BSP Governor Felipe Medalla did not rule out any possibility of another “surprise supply shock” that may impact inflation after the January 2023 print hit a more than 14-year high of 8.7 percent from 8.1 percent a month ago.
“It was actually higher than the high end of our forecast [for the month]. Most likely. Of course, I can’t rule out another surprise,” Medalla said in a message to reporters.
When asked if this would mean a surprise policy move, Medalla clarified that it could be a “surprise supply shock.”
The Monetary Board of the BSP raised the benchmark interest rate in December 2020 by 50 basis points to a more than 14-year high of 5.5 percent to prevent the second-round effects of inflation and defend the peso against the US dollar.