INFLATION could have dropped further in January on the back of favorable base effects, analysts polled by The Manila Times said.

The median forecast from nine economists was 3.0 percent, within the Bangko Sentral ng Pilipinas' (BSP) 2.8- to 3.6-percent estimate for the month.

If realized, inflation will have stayed within the BSP's 2.0- to 4.0-percent target for a second straight month after it fell to 3.9 percent in December.

Consumer price growth, which hit a 14-year high of 8.7 percent in January last year, began accelerating in 2022 in the wake of supply issues arising from Russia's invasion of Ukraine.

Monetary authorities embarked on a rate hike spree to combat the surge, and official inflation data due on Tuesday, February 6, could bolster expectations of a policy easing.

Forecasts

Union Bank of the Philippines chief economist Ruben Carlo Asuncion said inflation could have slowed to near the lower end of the BSP target.

Food inflation, which hit 5.5 percent in December, likely fell to 3.7 percent and led to overall inflation dropping to 2.3 percent.

Asuncion said he was more excited about core inflation, which could have fallen below 4.0 percent and would "persist at less than 4.0 percent for the rest of the year".

Rizal Commercial Banking Corp. chief economist Michael Ricafort, meanwhile, said base effects would have led to 2.7-percent inflation last month.

The rate could ease further moving forward, he added, absent significant damage from typhoons and dry spells from the ongoing El Niño weather pattern.

At 2.9 percent, ING Manila Bank senior economist Nicholas Antonio Mapa and China Banking Corp. chief economist Domini Velasquez's forecasts fall just below the midpoint of the central bank target.

Lower prices of vegetables, which the BSP cited as likely having contributed to lower January inflation, possibly tempered the rise in the headline rate, Velasquez said.

"Despite the anticipated slowdown in inflation, we believe the BSP will remain vigilant," she added.

"Various factors, including the impact of El Niño on rice production, geopolitical risks affecting freight costs and oil prices, and domestic risks like transport fare increases due to PUV (public utility vehicle) modernization, will keep inflation risks elevated throughout the year."

Mapa, meanwhile, said the favorable baseline would have contributed to lower inflation.

While rice inflation could have remained high, price growth likely slowed for other food items.

"We know that the most effective and quickest way to bring down inflation is to deploy supply-side remedies, and we hope that the fiscal authorities, especially the DA (Department of Agriculture), can continue to deploy short-term relief as well as implement structural reforms," Mapa added.

"We believe that we could very well see inflation settle within target for the year barring any supply side shocks and if fiscal authorities continue their push to combat price pressures."

Security Bank Corp. Sr. chief economist Robert Dan Roces, for his part, said inflation likely came in at 3.0 percent.

"While higher prices for agricultural items like rice, meat, and fruits, along with rising fuel costs, electricity, water rates, and annual sin tax adjustments all contributed to upward pressure, the overall trend remains positive," he added.

While a further slowdown is likely, "global volatility and domestic factors like adverse weather, wage adjustments, and transport costs require close monitoring."

HSBC Global Research economist Aris Dacanay and Bank of the Philippine Islands senior economist Emilio Neri, who both forecast January inflation of 3.1 percent, also flagged risks.

Rice, oil and services pose the biggest threats, Neri said, but inflation is still likely to fall within target this year.

Dacanay said that while the rate could have slowed substantially in January due to record year-earlier results, "we expect this dip to be short-lived once these base effects wear off."

"[W]e expect the BSP to keep policy rates steady in the upcoming Monetary Board meeting as the board awaits for headline CPI (consumer price index) to convincingly stay within the inflation target band," he added.

Pantheon Macroeconomics chief economist Miguel Chanco said rate cuts could start as early as the second quarter, with inflation likely having fallen to 3.4 percent last month.

Housing and utilities inflation, along with a continued decrease in food inflation, would have factored in the drop.

He acknowledged upward risks, mainly due to persistent food inflation, and said that authorities should be prepared to act promptly if new shortages arise.

"Assuming no new shocks, our base case is that average annual inflation will come in comfortably within the BSP's target range this year, at 2.8 percent, which we think will pave the way for the [Monetary] Board to start normalizing policy in the middle of second quarter," he added.

But Colegio de San Juan de Letran Graduate School economist Emmanuel Lopez, who also expects inflation to have slowed to 3.4 percent, said rate cuts could be delayed to the second half of the year.

"Inasmuch it is still early to presume that this will be the movement of prices in the future months, policy rates will still hold on to the present rate until such time the desired price target is achieved," he said.

Timing uncertain

BSP Governor Eli Remolona Jr. last month said that rate hikes would be implemented this year but not likely during the first semester.

He also indicated that if economic growth remained strong, monetary authorities would have room to raise interest rates should inflation pick up due to El Niño and geopolitical headwinds.

In an open letter issued after average inflation breached the target at 6.0 percent last year, the central bank chief said the rate could top 4.0 percent in the second quarter.

Analysts expect the BSP to only start cutting rates after the US Federal Reserve starts doing so. After the US central bank kept interest rates unchanged last week, Fed chief Jerome Powell dashed hopes that a cut would be announced in March.

The Monetary Board will hold its first meeting for 2024 on Thursday, February 15.