Citi hikes Philippines inflation forecast

MANILA, Philippines — Global banking giant Citi raised its 2024 inflation forecast for the Philippines to 3.6 percent from 3.4 percent previously, following the faster-than-expected headline print in February.

In a report, Citi Philippines economist Nalin Chutchotitham said underlying price pressures are expected to pick up further this year.

“We slightly revise up our 2024 inflation forecast to 3.6 percent (from 3.4 percent earlier), and maintain our 2025 inflation forecast at 3.3 percent, mainly because the January to February inflation readings came slightly above our estimates,” Chutchotitham said.

Inflation quickened to a two-month high of 3.4 percent in February from 2.8 percent in January, snapping four straight months of decline. Still, it was lower than the 8.6 percent a year ago and marked the third straight month inflation was within the two to four percent target.

But the February inflation was higher than the 3.3 percent Citi predicted before the data was released. It was also near the upper-end of the Bangko Sentral ng Pilipinas (BSP)’s forecast of 2.8 to 3.6 percent.

Chutchotitham said inflation was mainly driven by elevated rice prices and high energy costs, which needs to be monitored and addressed.

“Rice stock as of January was slightly below the five-year average, even if above that of 2023, supported by more private sector imports,” she said.

Food inflation stood at 4.8 percent as rice inflation surged to a 15-year high of 23.7 percent in February from the previous month’s 22.6 percent.

“Similarly, the annual livestock survey also showed that hog inventory at the beginning of 2024 remained very low, whereas prices appeared to have bottomed, and hence pork price stability may depend on import prices in the coming months,” Chutchotitham said.

She noted that possible higher adjustments in electricity rates, especially during the summer season, and in transport fares should also be monitored as domestic demand expands.

Another risk to the inflation outlook is a larger-than-expected minimum wage increase, she said.

“The push for higher wages, if strongly motivated, could be an additional upside risk to inflation amidst existing supply-side constraints. Normally, wages are hiked following agreement at the tripartite regional wage boards in varying times, resulting in a gentler impact on overall inflation,” she said.

Meanwhile, Citi expects the central bank to keep the key rate at 6.5 percent through the first half, before gradually cutting rates in the second semester. It sees a 25-basis-point cut on Aug. 15 and Oct. 17, and a possible 50-basis-point cut on Dec. 19 amid stabilizing inflation.

The BSP has emerged as the most aggressive central bank in the region after hiking key policy rates by 450 basis points since May 2022 to fight inflation and stabilize the peso. This brought the target reverse repurchase (RRP) rate to 6.5 percent, the highest in nearly 17 years.

“We continue to expect year-end RRP at 5.5 percent, and potential further cuts toward 4.5 percent by end-2025,” Chutchotitham said. “The timing of the Fed’s cut remains important, as the peso weakness could also exacerbate imported inflation.”

“In any case, we think that by mid-2024, real rate would have been high for long enough to ensure that inflation behaves, absent any shocks,” she added.