Softening inflation keeps BSP rate pause stance flexible

MANILA, Philippines — Consumer price growth continued to decelerate in July as the domestic economy continued to absorb the impact of aggressive interest rate hikes, leading experts to predict that rate cuts are unlikely to occur anytime soon.

Inflation eased to 4.7% year-on-year in July, slower than the 5.4% recorded in the preceding month and the 6.4% outturn a year ago.

Year-to-date, inflation averaged 6.8%.

Price growth in July moved at the pace that the Bangko Sentral ng Pilipinas projected, slowing down to land within their 2-4% target in the third quarter, as the economy absorbs expensive borrowing costs. Even then, inflation began soaring in 2022 as a result of supply chain bottlenecks, expensive fuel prices, a weak peso, and the Philippine economy’s full reopening which fueled consumer spending.

During the sixth consecutive month, consumer price growth decelerated, marking a retreat from the 14-year high recorded towards the end of 2022.

That said, the July outturn was still higher than the BSP’s 2-4% inflation target. 

Core inflation, computed without volatile items such as fuel prices, inched down to 6.7% in July, which is slower compared to the 7.4% recorded in the previous month.

To the BSP’s credit, monetary policy has done most of the work to lift the Philippines out of the inflation hole. Interest rates currently stood at 6.25%, after the central bank injected 425 basis points to tame painful price growth.

A BusinessWorld poll of 17 analysts projected a median estimate of inflation softening to 4.9% in July. 

Data broken down showed price upticks persisted across crucial food items, as typhoons battered parts of the country in July. The prices of vegetables and tubers rose 21.8% during the month, as well as rice and corn. National statistician Claire Dennis Mapa reckoned that vegetable prices were often the first victims when a typhoon hit Philippine shores.

Despite the rosy print, much was the same in Metro Manila as prices of food, housing utilities, and restaurants and accommodation services crept up faster in July. Inflation in NCR stood at 5.6% in July, much like the outturn recorded in the previous month.

Domini Velasquez, chief economist at China Banking Corp., anticipates that the BSP will maintain its rate pause stance, even considering the rate differential with the US Federal Reserve's 5.25-5.5% range.

“Although inflation is still expected to fall below the BSP’s 4.0% target by October, upside risks are increasing. Higher rice prices both domestically and globally is the key risk,” she said in a Viber message. 

The BSP said in a statement on Friday that inflation risks continue to lean towards the upside, citing the impact of transport fare hikes, wage increases, and persistent supply chain disruptions. 

“Global oil prices are also increasing and might continue to remain elevated in the 2nd half of the year due to supply constraints,” Velasquez said.

Nicholas Antonio Mapa, senior economist at ING Bank in Manila, noted that the decelerating inflation trend is not enough to prompt the central bank to start cutting rates.

BSP Governor Eli Remolona said in July that rate cuts will only happen if inflation settles within the 2-4% target. 

“Furthermore, with the BSP currently holding on to a relatively narrow 75bps spread of the Fed, we believe that any decision to reverse into easing mode will still be tied to potential rate cuts by the Fed,” he said in an emailed commentary. 

“Thus, BSP is projected to be on hold in the near term while monitoring domestic price trends and global developments such as moves by major central banks like the Fed,” Mapa added.