Inflation seen to stay above 5% this year

Despite 5-month downtrend

MANILA, Philippines — Headline inflation is projected to remain above five percent throughout the year, despite experiencing a downward trend for five consecutive months and dropping below six percent in June for the first time in over a year.

Former finance undersecretary Romeo Bernardo, now country analyst for the Philippines at New York-based GlobalSource Partners, said risks are still tilted to the upside with the ongoing wage and transport fare adjustments.

Bernardo said food supply issues remain the major concern especially with the predicted El Niño weather disturbance.

Inflation eased for the fifth straight month to 5.4 percent in June, the lowest since the 4.9 percent recorded in May 2022. It averaged 7.2 percent in the first half of the year, still way above the two to four percent target set by the Bangko Sentral ng Pilipinas (BSP).

“Despite the downtrend, the full-year average is still expected to settle above five percent given that inflation averaged 7.2 percent in the first half,” Bernardo said.

Based on its current path, the think tank believes the headline inflation rate should fall back to the BSP’s target by the fourth quarter of this year.

“The next Monetary Board meeting is scheduled on August 17. At this time, we expect the BSP to still keep rates on hold,” he said.

To cool inflation and stabilize the peso, the BSP’s Monetary Board has raised key policy rate by 425 basis points since May last year, making it the most aggressive central bank in the region.

The BSP kept the benchmark interest rate steady at a 16-year high of 6.25 percent during its back-to-back rate-setting meetings in May and June due to the inflation downtrend and the robust gross domestic product (GDP) growth in the first quarter.

On the other hand, MUFG Global Markets Research sees headline inflation easing to 5.6 percent this year and 3.9 percent next year after accelerating to 5.8 percent in 2022 from 3.9 percent in 2021.

The Japanese bank sees inflation easing below four percent by the end of 2023 as supply constraints ease.

It traced the persistence and magnitude of the inflation in the Philippines compared with other Asian countries to the failure to import sufficient quantities of food immediately and the much sharper drawdown in GDP during the COVID-19 pandemic.

“Moving forward, we have likely seen the worst of the domestic food supply constraints as the administration has shown a greater willingness to import food. The moderation in global oil prices, coupled with fading of reopening effects should also reduce domestic price pressures,” MUFG said.

According to MUFG, upside risks to Philippines inflation include further delays in food importation, possible sharp rise in minimum wages and potential hikes in jeepney fares.

The Japanese bank sees the BSP reversing its tightening cycle by cutting interest rates as early as the fourth quarter of this year following the lead of the US Federal Reserve.

It expects the central bank’s Monetary Board to slash key policy rates by 75 basis points that will bring the overnight reverse repurchase rate to 5.5 percent next year.

“We think the lower trajectory for headline inflation coupled with our expectation for the Fed to start cutting rates over the next 12 months (notwithstanding recent hawkish comments) should give BSP policy space to lower its key reverse repo rate starting fourth quarter of 2023,” MUFG said.