By DERCO ROSAL
UK-based banking giant HSBC announced that the battle to control surging inflation in the country has been won.
“We think the BSP's [Bangko Sentral ng Pilipinas] inflation battle is finally over,” the bank stated, following the sharp decline in inflation in September.
HSBC reported that inflation over the past four years has fallen below its forecast of 2.5 percent, signaling the end of the BSP's efforts to combat rising prices.
This “victory” is particularly significant given the drastic reductions from levels seen during the Covid-19 pandemic.
HSBC attributed this “victory” to a combination of “hard work and luck.” Notably, aggressive policy rate hikes by monetary authorities have played a role in curbing inflation, alongside initiatives by non-monetary authorities to reduce trade barriers on essential goods such as rice, coal, and pork.
The bank also cited the impact of fortunate circumstances, noting that lower global oil prices helped mitigate the effects of Typhoon “Enteng” in September. Additionally, a stronger peso helped alleviate supply disruptions, while stable rice prices contributed to a month-on-month decline in the headline Consumer Price Index (CPI).
While HSBC asserted that the inflation battle has been won, the Bank of the Philippine Islands (BPI) suggests that the fight is over—for now.
“Inflation may have reached its lowest point this year, with a potential rebound expected in the final three months of 2024 as favorable base effects fade,” the BPI said.
Forces against inflation’s further drop
Although it could remain below three percent barring supply shocks, risks like La Niña and African Swine Fever (ASF) could push prices up, the local bank said.
The country’s inflation “remains sensitive to climate conditions, and another extreme weather event could trigger a spike,” the BPI stressed.
Political landscape can also be factored in as escalating Middle East tensions could negatively impact future levels.
Alongside this, Singapore-based United Overseas Bank (UOB) noted that the new 12 percent value-added tax (VAT) on digital services in the Philippines will slightly offset the expected decline in inflation.
Its impact, however, may not be felt until the first quarter of 2025 as implementing guidelines are still underway.
Heightened risk of more rate cuts
Although HSBC was not able to give a rate cut forecast for the next months, it is now convinced that the 1.9 percent inflation rate is largely increasing “the risk of more than one policy rate cut in the remaining two Monetary Board meetings this year.”
The central bank initially signaled just one rate cut for 2024, but with easing inflation, there's now growing potential for cuts in both October and December, as hinted by Governor Remolona's recent statement.
Agreeing to HSBC, the BPI also expects the likelihood of continued policy rate cuts this year and additional reductions in 2025, lowering to 4.5 percent.
“While we expect more monetary easing, it is unlikely that the BSP will adopt an aggressive approach,” the BPI said, noting the uncertainties and inflation risks from supply constraints and geopolitical factors, preventing rates from falling to the past decade's lows.
Meanwhile, plans to cut the Reserve Requirement Ratio (RRR) are in place, aiming to infuse liquidity into the banking system.
However, HSBC expects that its immediate impact on inflation is expected to be minimal, as the central bank will likely reabsorb most of the liquidity using its monetary tools.