NextGen Day

🏦💹 MANILA – The Bangko Sentral ng Pilipinas (BSP) reaffirmed its commitment to adapting its policy stance to address the expansion of price pressures, even as domestic inflation shows signs of easing.

The rate of price increases in July slowed further to 4.7 percent, the lowest since March 2022, compared to the previous month’s 5.4 percent and the previous year’s 6.4 percent. The year-to-date average now stands at 6.8 percent.

The BSP stated that the deceleration aligns with its expectations for a sustained slowdown to between 4.1 and 4.9 percent in July, eventually reaching the government’s 2 percent to 4 percent target band by the last quarter of the year, provided there are no supply shocks.

However, the BSP also highlighted the presence of upside risks in the environment, stemming from potential transport fare increases, higher-than-expected minimum wage adjustments, supply constraints of key food items, El Niño weather conditions, and the possible knock-on effects of higher toll rates on prices of essential agricultural items.

These factors are expected to be offset by the impact of a weaker-than-expected global economic recovery.

“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 given the persistent upside risks to the inflation outlook,” the BSP said.

The central bank reiterated its support for non-monetary government measures to mitigate the impact of persistent supply-side pressures on inflation.

Regarding the month-on-month change in the headline inflation rate, Rizal Commercial Banking Corp. chief economist Michael Ricafort reported that the rate was 0.1 percent in July, slower than the previous month’s 0.2 percent. He attributed the decline to the lagged effects of recent storm damage, resulting in higher prices for certain agricultural products, domestic fuel prices, and the rise in the minimum wage in Metro Manila.

Looking ahead, Ricafort expects the easing of the inflation rate to slow slightly in the coming months due to the lag effect of these factors. Nonetheless, he remains optimistic that the monthly rate will decelerate to within the target level in the last quarter of the year.

Given these developments, Ricafort predicts that the BSP will keep its key rates steady or raise them by 25 basis points during the Monetary Board’s (MB) rate-setting meeting on August 17, 2023. He emphasized that such a move aims to maintain healthy interest rate differentials to stabilize the peso exchange rate versus the US dollar, import prices, and overall inflation.

Ricafort also mentioned that a pause on local policy rates may be possible if the peso exchange rate remains relatively stable or stronger against the US dollar, particularly if inflation eases due to higher base/denominator effects.

The market has discounted further hikes in the Federal Reserve’s key rates after the 25 basis points increase in the Federal Reserve fund rates last July, as inflation continues to ease, even in the US.

Looking forward, Ricafort indicated that inflation projections slowing down to about 4 percent from August to September, further to 3 percent from October to December, and 2 percent or lower in the first quarter of 2023 could eventually justify local policy rate cuts. He explained that this possibility is more likely, especially if the US central bank/Fed begins cutting rates, as expected by the markets and signaled by some Fed officials, supporting faster GDP growth amid reduced drag from inflationary pressures.

A potential cut in Fed and local policy rates, especially in 2024, would help reduce borrowing and financing costs, supporting faster economic growth. 🏦📊💵

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