With inflation breaking its six-month decelerating run in August, the market is more sure the central bank’s policy-making body, the Monetary Board, will not raise the key overnight rate on Sept. 21 amid new developments such as the possible impact of a rice price cap on inflation.

In its latest HSBC Global Research commentary, the British bank said they expect the Bangko Sentral ng Pilipinas (BSP) will keep its policy rate unchanged at 6.25 percent in the next policy meeting but this decision is “a tough call” for the inflation-targeting BSP, especially with a higher August inflation and possible second-round order impact of a temporary price ceiling on rice.

“After 6 months of straight deceleration, the August inflation print was a setback to the Philippines' inflation narrative and will likely complicate the BSP's monetary policy decision on September 21,” according economist Aris Dacanay.

He noted some immediate risk factors that BSP will have to review, such as the “slowest pace since 2011” second quarter gross domestic product (GDP) performance and the rice price cap although this will be for a short period only.

“Nonetheless, given how much of a staple rice is in the Filipino household diet, rice prices may potentially kickstart a series of second-round effects,” said Dacanay.

The government through Executive Order 39 implemented what could be a 30-day price cap on regular-milled and well-milled rice this week. The price ceiling did not include premium rice.

“Pre-empting this risk will therefore be a policy call for the BSP in the upcoming Monetary Board meeting,” he added.

The government reported headline consumer price index (CPI) of 5.3 percent for the month of August, higher than July’s 4.7 percent. While this was expected due to oil and food price pressures of recent weeks, it was the first time since February this year that inflation was on an uptrend again after reaching a peak of 8.7 percent in January.

Dacanay said the BSP will most likely not move its key overnight rate -- now called the target reverse repurchase or RRP rate -- and it will not be an easy decision for the BSP to leave the policy rate untouched on Sept. 21.

“We continue to expect the BSP to keep its policy rate unchanged at 6.25% in the September 21 meeting but acknowledge that it's a tough call,” he said.

Meanwhile, Dacanay noted that despite a higher headline CPI, the core CPI has continued to decline and this “easing shows that the rate hikes last year are already in the works of tamping inflation down.”

With August inflation at 5.3 percent, the year-to-date average is now at 6.6 percent which remains above the government’s average inflation target range of two percent to four percent for 2023.

Core inflation, which excludes selected volatile food and energy items in order to capture underlying demand-side price pressures, continued to slow down in August to 6.1 percent versus 6.7 percent in July.

“The uptick in inflation was due mainly to the faster price increases of rice, vegetables, and fish owing to supply disruptions wrought by recent weather disturbances. Non-food inflation also edged higher as transport inflation accelerated anew, reflecting the upward adjustment in domestic petroleum prices,” said the BSP in its own inflation commentary.

Despite the uptick in the August CPI, the BSP said inflation remains consistent with the BSP’s assessment that by the fourth quarter this year, CPI will fall below four percent “in the absence of further supply shocks.”

“The BSP will remain vigilant in monitoring emerging risks to the inflation outlook and stands ready to resume monetary policy tightening as needed to prevent the emergence of second-order effects and to keep inflation expectations well-anchored,” it added.