With a 4.1 percent November inflation, down from October’s 4.9 percent, the market now has more confidence that for December, the headline consumer price index (CPI) will further ease to below four percent which may lead to the central bank keeping the key rate intact at 6.5 percent when next it meets for a policy decision next week.
A below four percent CPI will be firmly within the government and Bangko Sentral ng Pilipinas (BSP) target range of two percent to four percent.
In a commentary on Tuesday, Dec. 5, both HSBC and Bank of the Philippine Islands’ (BPI) economists see slower inflation for the month of December which will likely convince the BSP’s Monetary Board to keep an “on-hold” policy decision on Dec. 14.
“Headline CPI in November came in slower than expected at 4.1% y-o-y, fortifying the view that the BSP will stay pat during the policy rate meeting next week,” said HSBC Global Research.
It noted that the weaker November inflation was broad-based and they “expect headline CPI to fall to within the BSP's 2-4% target band in December, barring any supply-side shock.”
The November inflation is within the BSP’s forecast range of four percent to 4.8 percent for the month. At 4.1 percent, November was the 20th straight month that headline CPI stayed above the BSP's target band. Meanwhile, core CPI eased for the eighth consecutive month, noted HSBC.
Core inflation does not include volatile items such as food and oil. “Month-on-month, core CPI continued to be soft (and) this goes to show that monetary policy continues to work through the economy by reining in demand,” it said.
“Despite the many upside risks to inflation, this consistent downtrend should provide the BSP leeway to pause in the last Monetary Board meeting for the year on 14 December 2023,” said HSBC.
As for the headline CPI, the bank’s analysts expect this trend to continue “with base effects quite favourable in the next three months and with food supply conditions more ample than last year; back then, typhoons took a toll on food supply.”
Generally, HSBC said the BSP will continue to be hawkish for some time. “We continue to expect the BSP to stay pat for longer based on inflation - more so with the need to mind the gap between the Fed (US Federal Reserve) and the BSP policy rates to help support the PHP (peso). We only expect the BSP to begin its easing cycle right after the Fed does its first rate cut. Our baseline view is for the Fed to do its first policy rate cut in 3Q 2024,” it said.
BPI economists believe the possibility of a below four-percent December CPI “is substantial.”
“Assuming the absence of major supply shocks, inflation may even reach 3% in the first 3 months of 2024. However, it could potentially rebound to 4% or higher in the 2nd quarter, especially if the impact of El Nino is worse than expected,” said the Ayala-owned bank.
Similar with HSBC, it pointed to rice prices as the primary factor contributing to inflation in the near future as “local supply continues to be at a level where rice inflation is usually double digits.”
BPI forecasts 2023 inflation will hit six percent and will drop to 3.7 percent in 2024.
As for BSP policy rate cuts, this might be too soon to speculate about, said the bank.
“It might be premature to expect rate cuts in the near future despite the improving outlook for inflation. The BSP might need to keep interest rates elevated for most of next year especially given the possibility of an inflation rebound in the 2nd quarter of 2024,” said BPI.
“Moreover, the rate cuts will also depend on what the Federal Reserve will do. It might be difficult to cut interest rates without any rate cuts from the Fed given the substantial current account deficit of the country, which could lead to volatility in the exchange rate,” it added.
The BSP in its own inflation commentary on Tuesday said the medium-term CPI will continue to be in moderate mode.
It also noted that the November inflation result is consistent with its own outlook as supply-side price pressures continue to ease as well as negative base effects.
However, upside risks still persists such as higher transport fares, higher electricity and oil prices, and a higher-than-expected minimum wage adjustments in the National Capital Region. The effects of El Niño weather conditions also continue to be a potential supply-side pressure to inflation.
The next Monetary Board policy rate meeting is Dec. 14, the last one for 2023. Since May 2022, the BSP has raised the target reverse repurchase rate by a cumulative 450 basis points to 6.5 percent.
The latest BSP baseline full-year CPI forecast is six percent for 2023, 3.7 percent for 2024 and 3.2 percent in 2025. On Nov. 16, the central bank likewise released a risk-adjusted inflation forecast for this year of 6.1 percent; 4.4 percent in 2024; and 3.4 percent in 2025.