By Luisa Maria Jacinta C. Jocson, Correspondent
PHILIPPINE INFLATION is anticipated to stay within the target for 2025, experts reported, paving the path for the central bank to persist with its easing trend.
“Looking forward, inflation is likely to be restrained, reflecting the easing in global commodity rates, along with regulatory actions such as tariff reductions on food products, notably on imported rice starting in July,” stated ASEAN+3 Macroeconomic Research Office (AMRO) Senior Economist Andrew Tsang.
AMRO forecasts that inflation will align with the Bangko Sentral ng Pilipinas’ (BSP) 2-4% target range for both 2024 and 2025.
“More specifically, the average inflation rate is expected to be 3.2% in 2025, maintaining the same level as in 2024, which marks a significant decrease from the 6% recorded in 2023,” Mr. Tsang noted.
Philippine headline inflation averaged 3.2% from January to November 2024. In 2024, monthly inflation figures have thus far remained within the BSP’s target range, with the exception of a 4.4% surge in July.
The BSP anticipates inflation to average 3.2% in 2024 and 3.3% in 2025.
“We still project the Philippines’ inflation to stay within the BSP’s 2-4% target bracket,” Krisjanis Krustins, director at Fitch Ratings’ Asia-Pacific Sovereigns division and leading sovereign ratings analyst for the Philippines, mentioned.
“In my revised perspective, taking into account all risks and based on past and present information, inflation in 2025 will predominantly remain within the target range,” Enrico P. Villanueva, a senior lecturer at the University of the Philippines Los Baños Economics Department, expressed.
Since 2022, the Philippines has struggled with elevated inflation due to external challenges and supply chain disruptions. From April 2022 to November 2023, inflation exceeded the 2-4% target band.
“The inflation outlook for 2025 significantly depends on external elements such as commodity prices and exchange rates, along with domestic supply-side management,” remarked John Paolo R. Rivera, a senior research fellow at the Philippine Institute for Development Studies.
“While the BSP’s easing trend is likely to persist, its direction will rely on inflation trends, peso stability, and movements in global monetary policy,” he added.
PRICE RISKS
However, analysts highlighted potential risks that could reignite inflation in 2025.
“There is always a possibility that a component of the consumer price index (CPI) will increase, such as in electricity and wages, as highlighted in the BSP’s medium-term inflation trajectory,” Mr. Villanueva noted.
He mentioned that these should be perceived as “regular possibilities.”
“What is essential for policymaking, nevertheless, is the intensity, probability, and correlation of these risks. Are the potential risks significant and likely enough to occur, and will these be prominent or countered by price reductions for other items in the consumer basket?” he added.
The BSP previously indicated that the risks to the inflation outlook for 2025 and 2026 remain skewed to the upside.
“There could be some upward risk to inflation due to strong economic growth and rises in minimum wages,” Mr. Tsang similarly mentioned.
He pointed out shocks such as supply-side disturbances resulting from natural disasters, which could escalate food prices.
“The impacts of climate change through potential sequences of severe typhoons could devastate Luzon and the Visayas,” Union Bank of the Philippines, Inc. Chief Economist Ruben Carlo O. Asuncion noted.
The Philippines has been the most at-risk nation worldwide for 16 consecutive years, according to the latest World Risk Index (WRI), assessing a country’s vulnerability to natural disasters and its societal ability to respond.
A recent study by the Asian Development Bank (ADB) also indicated that the Philippines could face a potential loss of 18.1% of its gross domestic product (GDP) by 2070 due to climate change under a high emissions scenario.
“Furthermore, escalating geopolitical tensions in various regions, such as Ukraine and the Middle East, could heighten the risk of global supply disruptions leading to sharp increases in commodity prices and shipping expenses, resulting in further inflationary pressures,” Mr. Tsang said.
“The effect would be aggravated if a sudden depreciation of the peso occurred due to external shocks,” he added.
Mr. Rivera mentioned that the depreciation of the peso attributable to a stronger dollar or trade imbalances “could elevate import costs, intensifying inflationary pressures.”
The peso has significantly closed at its all-time low of P59 per dollar thrice in 2024.
“The greatest threats to the inflation forecast originate from external developments, notably trade policy, inflation, and interest rates in the US, via their influence on the Philippine peso,” Mr. Krustins further stated.
Mr. Asuncion also recognized the potential spillovers from the upcoming Donald J. Trump administration. Mr. Trump is expected to take the US presidency on Jan. 20.
Economists have cautioned about the possible effects of Mr. Trump’s protectionist trade policies on the Philippines, which heavily depends on the United States for its business and economic activities.
The US remains the nation’s leading export destination and primary source of remittances.
The nation’s reliance on imports also heightens its vulnerability to external shocks, Mr. Rivera added.
“Strong consumer spending driven by improved employment and remittance inflows may lead to demand-pull inflation, along with the resurgence in tourism which could further boost inflation from the services sector,” he noted.
Nonetheless, Mr. Tsang observed that the BSP’s risk-adjusted inflation forecasts would continue to align within its 2-4% target range. When considering risk factors and scenarios, the BSP still predicts inflation settling within the target range, with a risk-adjusted forecast of 3.2% for 2024, 3.4% for 2025, and 3.7% for 2026.
“Despite these risks, if global oil prices stabilize and domestic food supply issues are addressed, inflation could remain within the BSP’s 2-4% healthy target bracket. However, managing supply-side pressures will be crucial,” Mr. Rivera remarked.
“Inflation may still stay within target, providing sufficient allowance for the BSP to maintain its easing cycle, facilitating economic growth, particularly if the government is ready to confront these identified risks,” Mr. Asuncion concluded.
FURTHER MONETARY EASING
The central bank has the capacity to proceed with its policy relaxation amidst expectations of inflation remaining on target, analysts asserted.
“With inflation projected to remain within target, the BSP will likely persist with its rate-cutting trend,” Mr. Asuncion remarked.
Mr. Tsang indicated that the speed of the BSP’s rate-reduction cycle will probably be “gradual and contingent on data.”
“In recent years, a vigorous monetary policy tightening during 2022 and 2023 that raised the policy rate to a 17-year peak, combined with the government’s direct interventions, has played a role in bringing headline inflation back to within the BSP’s inflation target of 2–4%,” he explained.
In 2024, the Monetary Board decreased the target reverse repurchase (RRP) rate by 75 basis points (bps) with a 25-bp reduction during each of its August, October, and December meetings, lowering its policy rate to 5.75%.
“From our perspective, there is
“space to progressively modify the policy rate to a less stringent position considering decreased inflation,” Mr. Tsang remarked.
Mr. Krustins mentioned that the central bank “might still manage to implement some additional rate reductions, but the pace is expected to be slower due to the external risks facing the Philippine economy.”
“In light of the measured conduct of the BSP in previous years, monetary policy in 2025 might persist in taking a cautious stance during the initial half of the year, vigilantly observing both inflation and external factors,” Mr. Rivera remarked.
Mr. Krustins anticipates the BSP will lower rates by 100 bps, while Mr. Asuncion predicts a total reduction of 75 bps in 2025.
“If inflation continues to moderate and global financial circumstances enhance, the BSP could potentially decrease policy rates further by an additional 25 bps to 50 bps by the end of 2025, possibly bringing the benchmark rate nearer to 5%,” stated Mr. Rivera.
BSP Governor Eli M. Remolona, Jr. indicated that implementing cuts amounting to up to 100 bps in 2025 might be “excessive,” but clarified that they are “neither excessively dovish nor excessively hawkish.”
He also suggested the likelihood of executing a rate reduction during the first policy meeting of the Monetary Board in 2025.
Economic expansion will also be a crucial factor in the central bank’s policy orientation, according to Mr. Asuncion.
“The BSP will assess how the economy performs in the fourth quarter and the first quarter of 2025 to determine if the economic performance warrants additional rate easing,” he elaborated.
The Philippine economy experienced a growth rate of 5.2% in the third quarter of 2024, marking the slowest growth in five quarters.
Conversely, elements that could disrupt the BSP’s easing trajectory include a strengthening dollar and the speed of the US Federal Reserve’s easing measures, analysts noted.
“The primary risk factor currently would be further strengthening of the dollar, potentially stemming from the imposition of tariffs by the new US administration,” explained Mr. Krustins.
“However, risks are more inclined towards gradual easing. We observe that the interest rate differential between the US and the Philippines is narrower now compared to historical standards,” he further noted.
Mr. Rivera mentioned that a robust dollar or unexpectedly high Fed rates “could compel the BSP to sustain a more neutral position to prevent capital outflows and depreciation of the peso.”
The Fed initiated its easing cycle in September 2024 with a significant 50-bp reduction and followed it up with two 25-bp cuts in its November and December sessions, lowering its target rate to 4.25%-4.5%.
Nonetheless, the US central bank has indicated a potential for slower easing this year amidst inflation apprehensions, with Mr. Trump’s proposed tariffs likely to elevate prices.
Further easing by the BSP is also “complicated by high global or domestic prices that may necessitate the BSP to maintain rates steady or even pause the easing cycle,” Mr. Rivera added.
“What can derail monetary easing is the belief that all inflation risks must be entirely mitigated (which is unrealistic), and that high interest rates are the remedy to price shocks, which generally influence supply instead of demand,” articulated Mr. Villanueva.
Holding the economy “hostage” to elevated interest rates that might suppress demand due to risks “does not appear to be a sensible position,” he added.
“Shocks are inherently unpredictable in both their timing and consequences. The most effective method to handle them is to address them when they arise and enhance the economy’s resilience for such occurrences,” Mr. Villanueva proposed.
“Preparation is achieved not through high rates but via strategies that enhance market efficiency such as diversifying supply sources, readiness to modify tariffs and fees, and temporary cash assistance.”