BSP sees inflation slowing down to within-target levels in Q4

By Joann Villanueva

June 6, 2023, 6:52 pm

MANILA – Balance of risks to domestic inflation remain on the upside but the Bangko Sentral ng Pilipinas (BSP) said Tuesday that monthly rate is still expected to slow to within-target levels in the last quarter of the year without any shocks.

The Philippine Statistics Authority (PSA) reported earlier in the day another slowdown in the country's inflation rate last May to 6.1 percent from the previous month’s 6.6 percent, the fourth consecutive month of deceleration.

The average inflation in the first five months of the year stood at 7.5 percent, still higher than the government's 2 to 4 percent target band.

The BSP forecasts inflation to average at 5.5 percent this year.

In a statement, the central bank said the May 2023 inflation print is within the central bank's 5.8 to 6.6 percent forecast for the month "consistent with the overall assessment that inflation will remain elevated over the near term before gradually decelerating back to target range in Q4 (fourth quarter) 2023 in the absence of further supply-shocks."

"The balance of risks to the inflation outlook for 2023 and 2024 remains tilted to the upside owing to persistent constraints in the supply of key food items, the potential impact of El Niño on food prices and utility rates, as well as the effects of possible additional adjustments in transportation fares and wages," it said.

These factors, the BSP said, are expected to be countered by the weaker-than-expected recovery of the global economy, among others.

The central bank's policy-making Monetary Board (MB) will include the latest inflation report, along with the macroeconomic outlook, in the assessment of the latest developments during the rate setting meeting of the MB on June 22.

"The BSP stands ready to adjust the monetary policy stance as necessary to prevent the further broadening of price pressures as well as the emergence of additional second-order effects. The BSP also supports for the timely and effective implementation of non-monetary government measures to mitigate the impact of persistent supply-side pressures on inflation," it added.

Last May 18, the MB kept the BSP's key rates steady, the first since rate hiking cycle started in May 2022, after noting the deceleration of inflation rate and possible slower print in domestic output based on demand indicators.

Since May 2022, the BSP's key rates have been hiked by a total of 425 basis points from the record-low 2 percent for the overnight reverse repurchase (RRP) during the pandemic.

The gross domestic product (GDP) exceeded expectations when it grew by 6.4 percent on an annual basis in the first three months of the year.

GDP growth in the first quarter of this year was slower than the previous three month's 7.1 percent but authorities and analysts traced this to base effects of last year's high growth levels.

Key rate pause, RRR cut

In a report, Rizal Commercial Banking Corporation (RCBC) chief economist Michael Ricafort said further slowdown of domestic inflation rate, which posted a zero expansion on a monthly basis, bolsters the chances for another pause in the BSP's key rates and the possibility of reduction in banks' reserve requirement ratio (RRR).

"Easing inflation trend would support continued pause in local policy rate on June 22, 2023; amid some recent signals/reiterations of a possible cut on large banks' reserve requirement ratio (RRR), as early as June 2023, as signaled recently as one of the options to ease monetary policy other than a local policy rate cut especially if there is no Fed (Federal Reserve) rate cut yet by then," he said.

The Bank of the Philippine Island (BPI) also sees inflation to post a 4 percent level monthly rate by September this year if the current trend continues and without any oil price shocks.

It, however, noted that "a number of risks could delay this from happening" and these include the rice supply issues caused by vulnerable production issues abroad, the looming El Niño phenomenon, and oil production cuts among major oil producers around the world.

"With rice accounting for almost 9 percent of the inflation basket, the impact of this commodity is significant," it said.

The BPI report also cited the possibility of another increase in the BSP's key rates "given the uncertainties surrounding the Federal Reserve."

"Keeping an appropriate interest rate differential between the US and the Philippines is still important as this could affect the exchange rate," it said. "With the country becoming more reliant on imports, the depreciation of the (Philippine) peso may prevent inflation from declining faster."

Rate cut

In a report, HSBC said the slowdown in domestic inflation last May is no surprise and "should give the BSP some confidence to cut the RRR in July while keeping the policy rate steady at 6.25 percent in the upcoming meeting."

"Our baseline view is for the BSP to be on hold until the second half of 2024," it said, citing that Philippine monetary authorities may decide on a rate cut "only after the Fed cuts its own."

"Since the Philippine economy is in twin deficits, it is susceptible to abrupt changes in the USD-PHP (United States dollar-Philippine peso). That said, the central bank will likely be in defensive mode by maintaining an appropriate policy rate buffer above the Fed rate," it said, adding its forecast for a possible Fed rate cut starting in the second quarter of 2024. (PNA)