Nomura cuts Philippines inflation forecasts

MANILA, Philippines — Nomura Global Markets Research slashed its inflation forecasts for the Philippines in the next two years due to the reduction of import tariffs on rice to 15 percent from 35 percent.

Research analysts Euben Paracuelles and Nabila Amani said Nomura has lowered its full-year inflation forecasts to 2.8 percent from 3.7 percent for 2024 and to 2.3 percent from 3.3 percent for 2025.

The projections are also significantly lower than the risk-adjusted 3.8 percent full-year forecast of the Bangko Sentral ng Pilipinas (BSP) for this year and the 3.7 percent estimate for next year.

“We reduced our 2024 and 2025 inflation forecasts to reflect the government’s announcement that import tariffs on rice will be cut from 35 percent to 15 percent,” they said. “We assume these (tariff cuts) will start in July and be reflected in the CPI data by August.”

Headline inflation rose to 3.9 percent in May from 3.8 percent in April, marking the highest in six months. Inflation averaged 3.5 percent in the January to May period, within the government’s two to four percent target.

Inflation quickened to six percent in 2023 from 5.8 percent in 2022 due to soaring oil and food prices. The headline inflation has breached the central bank’s two to four percent target range for two consecutive years.

The aggressive rate hikes delivered by monetary authorities helped tame inflation after it peaked at 8.7 percent in January 2023. The BSP Monetary Board lifted key policy rates by 450 basis points from May 2022 to October 2023, making it the most aggressive central bank in the region.

However, Paracuelles and Amani said the tariff cuts on rice would have limited implications on monetary policy.

“We still think the BSP will start its cutting cycle only in October, when we expect inflation to be more entrenched within its two to four percent target,” they said.

The BSP is also unlikely to start cutting borrowing costs before the US Federal Reserve to avoid adding depreciation pressures to the peso. Nomura expects the Fed to start easing in September.

“In terms of foreign exchange policy, we believe the BSP maintains a flexible market-determined foreign exchange regime. We still forecast 150 basis points of total rate cuts from the BSP through the second quarter of 2025 to a terminal rate of five percent,” they said.

Meanwhile, Nomura kept its 2024 gross domestic product (GDP) growth forecast of six percent for the year, higher than the 5.6 percent in 2023, with public investment spending likely to remain the main growth engine.

Paracuelles and Amani added that the Philippine government continues to push for further progress on public infrastructure projects, supporting their forecast for higher average GDP growth of 6.2 percent over the rest of the year.