Nomura Global cuts 2023 PHL inflation estimate

NOMURA GLOBAL Markets Research has lowered its inflation forecast for the Philippines due to the lower-than-expected inflation readings over the past two months, which are likely to have persuaded monetary authorities to pause their rate hike cycle earlier than expected.

In a May 5 report Nomura Global Markets Research revised downward its consumer price index (CPI) forecast for the Philippines to 5.3% this year from the 5.8% average it projected in March.

The projection is also lower than the 6% full-year forecast of the Bangko Sentral ng Pilipinas (BSP) full-year forecast for 2023.

The Nomura Global projection was issued in a note, “Philippines: Higher inflation for longer” written by Nomura Global Chief ASEAN (Association of Southeast Asian Nations) Economist Euben Paracuelles and analyst Rangga Cipta. 

“Taking into account the CPI releases (that were) surprisingly lower in the last two months, we reduce our 2023 headline inflation forecast to 5.3% from 5.8%, still above BSP’s 2-4% target,” Nomura Global said.

Headline inflation slowed to 6.6% in April, from 7.6% in March, the Philippine Statistics Agency said.

“However, the trajectory penciled in our new forecast suggests a steeper decline in the second half of the year, with headline inflation falling back to within BSP’s target by September, earlier than our previous forecast of November,” Nomura Global said.

Nomura Global also trimmed its core inflation forecast to 5.7% from 5.9% previously, adding however that core inflation may remain elevated in the coming months.

“We believe the services components and discretionary items will remain sticky for some time, before easing later in the year and becoming more in sync with lower food and energy prices,” it said.

Core inflation slowed to 7.9% in April from 8% in March. The March reading was the highest since December 2000.

“As we argued, some persistence in second-round effects remain evident, and could continue to do so in the near term especially with prolonged increases in electricity rates and transport fare adjustments,” Nomura said.

It also said that as minimum wage negotiations typically take place this month or in June, workers may ask for higher wages due to increased utilities costs and fares.

The central bank may start to keep rates steady at its next policy meeting on May 18 due to easing inflation, Nomura Global added.

The Monetary Board has raised borrowing costs by 425 basis points (bps) since May last year, bringing the key policy rate to a near 16-year high of 6.25% to tame inflation.

“In line with our lower inflation forecasts, we accordingly remove the remaining two 25-bp hikes from our policy rate forecast and now expect BSP to leave (rates) unchanged at 6.25% this year,” Nomura Global said.

It noted that the central bank could also change its inflation assessment to “more balanced” from “tilted heavily to the upside.”

“This would likely mark the end of BSP’s hiking cycle, in our view, although we believe the communication from BSP will still suggest it remaining vigilant against inflation risks,” it said.

The BSP sees full-year inflation averaging 6% this year, before decelerating to 2.9% in 2024.

Nomura Global said the BSP is unlikely to turn “more dovish” and will only start cutting the benchmark interest rate in March next year with the Federal Reserve also expected to start easing by that time.

However, the BSP may cut the bank reserve requirement ratio (RRR) by the second half of the year.

“If headline inflation continues to decline in coming months as we expect, BSP could resume taking steps towards its long-term goal of reducing the RRR to single-digit levels from 12% currently,” Nomura said.

The RRR for big banks is one of the highest in the region. Reserve requirements for thrift and rural lenders are at 3% and 2%, respectively.

“In our view, BSP will also likely make the case for only gradual RRR cuts, so that the impact on monetary conditions will likely be neutral, arguing that this can be offset by greater use of BSP’s new instruments for liquidity absorption, including the term deposit facility,” it said.

A cut in the RRR would represent an operational adjustment to facilitate the BSP’s shift to market-based instruments for managing liquidity, particularly the term deposit facility and the BSP securities.

The BSP has committed to bringing down the RRR of big banks to single digits by this year. — Keisha B. Ta-asan