UOB sees Philippine inflation rate reaching 3.5% in 2022, above central bank estimates

UOB expects the full-year inflation rate in the Philippines to fall to an average of 3.5 per cent in 2022, 0.2 percentage point higher than the forecast by its central bank.

In a research note on Tuesday (Dec 7), economists Julia Goh and Loke Siew Ting said they expect the downward trend in the annual inflation rate to continue well into the first half of 2022 due to the high base effects from the year before.

"Thereafter, we expect inflation to revise course and inch higher in H2 2022 but remain within the Bangko Sentral ng Pilipinas' (BSP) 2 to 4 per cent target range," they added.

Among the key factors Goh and Loke said would lift consumer prices in the second half of 2022 include the expiry of tariffs on pork imports, potential cost pass-through effects, food supply disruptions due to bad weather, as well as continued weakness in the Philippine peso.

While the risks to the inflation outlook are tilted to the upside, especially in the second half of next year, Goh and Loke said the ongoing direct non-monetary policy measures and slack in the labour market will likely help to keep headline inflation in check.

Headline inflation in the Philippines had eased for the third straight month to 4.2 per cent year on year in November.

Noting that the inflation rate averaged 4.5 per cent in the first 11 months of 2021 year-to-date, the analysts reiterated their full-year estimate of 4.5 per cent, which is above BSP's forecast of 4.3 per cent.

They added that the higher-than-expected inflation out-turn in November, and the emergence of the Omicron Covid-19 variant, continue to justify an accommodative monetary policy stance going into 2022.

"The central bank has also repeatedly said that it will continue to prioritise providing policy support for the economy, while keeping an eye on the potential build-up of second round inflationary pressures and developing other tools to address any impact on financial markets from the changes in global monetary policy when necessary," noted Goh and Loke.

They expect BSP to maintain status quo on policy rates when they meet on Dec 16 and keep the overnight reverse repurchase rate steady at 2 per cent until mid-2022.