The likelihood of the Philippines’ monetary policy aligning with the decision of the US Federal Reserve to pause rate action appears low, given the high consumer price growth in the country, as stated by Francisco Dakila Jr., Deputy Governor of the Bangko Sentral ng Pilipinas.
Dakila made this statement during an economic briefing for Singapore’s business community hosted by the Marcos Jr. administration.
He emphasized that the Philippines may deviate from the Fed’s course if the domestic inflation situation necessitates a different approach.
Following a peak at a 14-year high in late 2022, inflation in the Philippines has somewhat eased.
The current policy rate stands at 6.25%, reflecting the BSP’s substantial increase of 425 basis points to tackle rapid price growth.
During the previous Monetary Board meeting, the BSP decided to moderate its aggressive rate hikes to allow the economy to experience the delayed impact of expensive borrowing costs.
Dakila indicated that the minutes from the May policy meeting suggested the BSP’s inclination towards a more cautious approach.
Setting aside the hawkishness, the central bank’s inflation outlook anticipates a decline in inflation within the target range of 2-4% by the final quarter of 2023.
Governor Felipe Medalla has suggested that inflation could fall below 4% by either October or December, aided by a slowdown influenced by base effects.
In an effort to address inflation and align with investor expectations in 2022, the BSP mirrored the actions of the US Federal Reserve.
In July, an emergency policy meeting was held, and interest rates were raised by 50 basis points to manage inflation.
According to Domini Velasquez, the chief economist at China Banking Corp., the pressure to minimize the interest rate differential between the Philippines and the US will impact policy decisions.
In a Viber message, she expressed the view that considering the Fed’s recent indication of possible quarter-point hikes, the BSP may be compelled to raise rates at least once to maintain an adequate interest rate differential.
Velasquez clarified that such a move does not indicate a shift in the outlook for decelerating inflation.
Rather, the BSP’s intention would be to prevent capital flight and unwarranted depreciation of the peso, as observed last year when the peso declined to 59.00 per USD.
However, Velasquez expects that the BSP will avoid preemptively raising rates before their meeting this month.
In a Viber message, Jun Neri, the lead economist at the Bank of the Philippine Islands, stated that the BSP could still consider a rate hike if inflation shows signs of picking up.
He emphasized that while many hope the BSP has concluded its rate hikes, the possibility of additional increases cannot be ruled out if domestic inflation rebounds or if the Federal Reserve raises rates later in the year.
Is inflation softening?
Dakila highlighted during his Thursday morning presentation that the easing inflation trend is gradually impacting other sectors of the economy.
Consumer price growth has slowed for the fourth consecutive month, indicating the effectiveness of monetary policy in curbing inflation.
In May, inflation declined to 6.1%, a slower rate compared to previous months but still higher than the 5.4% recorded a year ago.
Government data for May revealed a decrease in the prices of certain commodities, including food and services, although not significantly enough to alleviate the burden on consumers.
Nationwide, prices of specific food products like rice, vegetables, and milk saw a decline.
However, utility costs, specifically rent and water, saw an increase in May.
On the other hand, core inflation, which excludes volatile items like fuel, remained persistently high, standing at 7.7% in May, slightly lower than the 7.9% reported in the previous month.
This contradicts Dakila’s perspective but aligns with Neri’s viewpoint.
Neri stated that the close proximity of core inflation to 8% suggests limited spread thus far and indicates a significant risk of a rebound.
The declines have primarily affected food and energy.
During their recent meeting, economic managers decided to maintain their targets while considering the risks associated with El Niño, which could negatively impact agricultural production, as it has done in the past.
A decline in agricultural output, coupled with persistent disruptions in the supply chain, could accelerate consumer price growth and impede overall economic progress.
Despite this, Velasquez concurred with Dakila’s assessment, stating that inflation is projected to reach its target by October, one month earlier than previously anticipated.
Additionally, she added that average inflation is likely to be lower at 5.5%, aligning with the BSP’s most recent projection.
- Key Prices for PH Bluechip Stocks 30% Above 52-Week Low - June 4, 2024
- May 2024 Market Sentiment Rating of 30 PH Bluechip Stocks - June 3, 2024
- EquiTalks: ICT, BPI, AEV Updates – 5.29.2024 - May 29, 2024
