Inflation seen cooling further in coming months

MANILA, Philippines — The increase in prices will continue to slow down in the coming months, bank economists said.

This comes after six consecutive months of easing, following a peak at a 14-year high of 8.7 percent in January.

BPI lead economist Jun Neri said headline inflation is seen declining in the coming months as it returns to within the two to four percent target range of the Bangko Sentral ng Pilipinas (BSP).

“Assuming the absence of major supply shocks, headline inflation may finally return to the target of the BSP by September or October,” Neri said.

Headline inflation eased to 4.7 percent in July, the lowest since the four percent booked in March 2022, while core inflation slowed to 6.7 percent.

Inflation averaged 6.8 percent during the seven-month period and stayed above the central bank’s two to four percent target.

However, Neri said there are upside risks that could change this outlook.

“The most significant among these is El Niño. It should be noted that El Niño is a global phenomenon that could affect the food production of other countries. Importation is usually the immediate solution of the country when there is a shortage of supply, but this might become difficult if other countries are also affected by El Niño,” Neri said.

He also cited the possibility of a global rice shortage in the coming months is increasing after India recently announced a ban on the export of non-basmati white rice, while a Thai government agency has encouraged farmers to plant less rice to save on water.

The Philippines sources most of its rice imports from Vietnam, but it does not necessarily protect the country from a surge in global rice prices.

According to Neri, this is a major risk to inflation since rice accounts for almost nine percent of the consumer price index basket.

Currently, rice inflation is already at its highest level in almost five years at 4.2 percent.

Neri added that inflation from services may also remain sticky as consumers continue to focus their spending on these.

He said base effects may continue to pull down inflation in the first half of 2024, but a significant rebound is possible in the second half especially if the impact of El Niño is more substantial.

The economist of the Ayala-led bank pointed out that the current path of inflation gives the BSP’s Monetary Board the space to keep rates steady until the end of the year as the probability of another hike is low, but it could go up depending on what the US Federal Reserve would do.

ING Bank senior economist Nicolas Mapa said the favorable base effects coupled with improved supply conditions and moderating global commodity prices points to inflation slipping within target as early as September.

Despite the sixth month of deceleration, the Dutch financial giant does not expect the BSP to begin its easing cycle just yet.

Mapa said BSP Governor Eli Remolona indicated that he would consider potential rate cuts should inflation settle “well-within” the target band of two to four percent.

“Furthermore, with the BSP currently holding on to a relatively narrow 75 bps 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,” Mapa said.

According to Mapa, the 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 US Fed.

HSBC economist for ASEAN Aris Dacanay said consumer price index (CPI) numbers look even better in July with headline inflation unchanged relative to June.

“This just goes to show that inflation is headed back to the BSP’s two to four percent target band in a steady and consistent manner. Our baseline view is that inflation will fall to within the target band by Q4 2023,” Dacanay said.

Dacanay explained base effects were favorable with transport CPI providing disinflationary pressures on a year-on-year basis.

However, Dacanay said other factors were also at play that led to inflation momentum waning such as lower electricity prices and moderating food prices, the former being largely due to Meralco cutting power rates by P0.72 per kilowatthour to P11.19 per kwh.

“But despite waning price pressures, we still expect the BSP to keep its policy rate as it is at 6.25 percent until after the Fed begins its easing cycle. Our base case is the Fed cutting rates in 2Q 2024,” Dacanay said.

HSBC also expects inflation to turn the corner again and accelerate in the first quarter of 2024 due to the expiration of Executive Order 10, which temporarily reduced the tariff rates for rice, corn, pork, and coal.

Thus would add 1.4 percentage points to inflation.

“Risks are also on the upside with India banning rice exports and the minimum wages outside of Metro Manila potentially being hiked in line with the recent wage hike done in the capital. These, in turn, will likely complicate the starting-date of the BSP’s easing cycle,” Dacanay said.

The British banking giant said the Philippines has the least monetary policy freedom in ASEAN when it comes to diverging from the Fed.

Dacanay said the economy’s wide current account deficits make it susceptible to capital outflows and abrupt changes in the exchange rate.

Furthermore, the real policy rate in the Philippines is currently lower than the US, which adds to the sensitivity of the economy to capital flowing out.

Remolona said in a television interview with CNN Philippines late Thursday that the onslaught of Typhoon Egay would impact commodity prices, which could prompt the central bank to maintain its hawkish stance.

“That is why we are not ready to ease. We are not out of the woods because of these kinds of supply-side factors,” Remolona said.

“We continue to watch the data and we are going to be ready to raise rates if necessary as soon as Aug. 17, that’s our next meeting,” he said.

Despite the decline in the inflation rate, Remolona highlighted that significant risks are still looming.

“El Niño is beginning to hit our neighbors. They are experiencing drought and having trouble producing food that could affect us,” Remolona said.

“And even locally, transportation prices are going up, minimum wages are going up. We worry about the effects of these things on expectations,” the BSP chief said.

As inflation picked up in 2022, the BSP tightened monetary policy aggressively and jacked up rates by 425 basis points over a one-year period to settle at 6.25 percent.

Due to the inflation downtrend and the stable peso, the BSP Monetary Board extended its prudent pause as it kept interest rates steady for two straight rate-setting meetings in May and June.