Easing inflation allows BSP to decouple from US Fed – think tank

MANILA, Philippines — The Philippines’ cooling inflation in the last six months has allowed the Bangko Sentral ng Pilipinas (BSP) to once again decouple from the US Federal Reserve, according to New-York based think tank GlobalSource Partners.

Former Finance undersecretary and GlobalSource country analyst Romeo Bernardo said the further easing of inflation to 4.7 percent in July from 5.4 percent in June supports monetary authorities’ view that the BSP need not match the 25-basis-point policy rate hike delivered by the US Fed last month.

“Based on signals from BSP Governor Eli Remolona, an extended pause is expected,” Bernardo said.

Despite the downtrend, Bernardo said core inflation, at 6.7 percent, remains quite elevated and upside risks to consumer prices are again rising.

“These include additional pressures on food prices from external factors (India’s rice export ban, end of Russia-Ukraine grain deal), as well as weather problems (crop damage due to typhoons, high odds of El Niño by end-year),” he said.

According to Bernardo, closely watched right now is the price of rice, which climbed by 0.9 percent month-on-month in July and is up by 4.2 percent year-on-year.

“The world price of rice has risen by over 15 percent in the year to July. The upswing in global oil prices, if sustained, will add even more pressure. With all these risks, we expect the BSP to also keep an eye on changeable financial market sentiments given narrowed interest rate differentials,” Bernardo said.

Despite the inflation downtrend, he pointed out that a reversal of the tightening cycle is unlikely this year after the BSP raised key policy rates by 425 basis points between May 2022 to May 2023 to tame inflation and stabilize the peso.

This brought the overnight reverse repurchase rate to 6.25 percent from an all-time low of two percent.

With easing inflation and stable peso, the BSP extended its prudent pause as it kept interest rates unchanged anew last June.

Bernardo said the BSP is likely to keep key policy rates on hold during its next rate-setting meeting scheduled on Aug. 17.

“Overall, notwithstanding expectations of slowing economic growth as revenge spending eases and market talk of a policy rate cut, we think that prospect is unlikely within the year. The second quarter GDP is due out next week while the Monetary Board is scheduled to meet the week after on Aug. 17,” he said.

The New York-based think tank sees the Philippine inflation easing to 5.3 percent this year after accelerating to 5.8 percent last year from 3.9 percent in 2021.

“Based on its current path, the headline rate may fall within the BSP’s two to four percent target as soon as September, which would bring the average inflation for the year to 5.3 percent,” he said.