With inflation projected to climb back to above four percent in the coming months – or as soon as May – the market expects the Monetary Board, the policy-making body of the Bangko Sentral ng Pilipinas (BSP), to hold its current 6.5 percent benchmark rate steady for longer than anticipated.
“Elevated rice prices is still a concern and we expect the BSP to keep its policy rate unchanged (in the next) rate-setting meeting,” said HSBC Global Research. The next policy rate meeting is on April 8.
Inflation or increases in prices of consumer products accelerated to 3.7 percent in March versus 3.4 percent in February. Rice inflation increased by 24.4 percent year-on-year, the fastest since February 2009, noted HSBC.
“The numbers are consistent with our view that headline CPI (consumer price index) will eventually breach the central bank target in 2Q 2024, which may, perhaps, result in some market jitters. Looking closely, however, the rise is mostly due to unfavorable base effects. Once these base effects wear off in August, inflation should immediately return to within the BSP's target band,” said HSBC.
The base effects came from rice. HSBC explained, “remember that global rice prices steeply rose in August last year. Global rice prices are still elevated but Executive Order 50, which extended the lower tariff rates for rice, has stemmed the extent of how much domestic rice prices can surge. As a result, the acceleration in domestic rice prices slowed since December 2023, in contrast to the very steep uptick seen in August and September that year. Thus, when we hit August this year, base effects should turn favorable, leading to a significant deceleration in headline inflation.”
“This isn't to say that rice prices aren't a concern,” it added. Since rice is a big staple in the Philippine consumer basket, high rice prices may spill over to the other components of the CPI basket, it also noted.
“The good news is that this spillover seems to be benign so far, with core CPI easing year-on-year. This showcases that monetary policy is in the works and that there is no impending need for the BSP to raise policy rates further,” said HSBC.
Analysts from Bank of the Philippine Islands (BPI) said the BSP could maintain a hold stance until June.
“The BSP will likely remain prudent by keeping interest rates steady in the first half of the year. Rate cuts might be considered once inflation stabilizes within the BSP’s target range in the 3rd or 4th quarter,” said BPI.
However, it added that “aggressive rate cuts are unlikely given the prevailing inflationary environment.”
“Global supply constraints and geopolitical tensions are contributing to a faster rise in prices compared to the past decade, limiting the BSP's room for significant rate reductions. Moreover, the economy has been resilient despite the elevated interest rates, with loan growth showing a recovery in January. We continue to expect a rate cut of around 75 bps this year,” said BPI.
Timing of BSP rate cuts also depend on what the US Federal Reserve will do. “If local inflation conditions are right, the BSP will likely respond immediately with rate cuts once the Fed begins its easing cycle,” said the Ayala-led bank.
Last Friday, after the government announced the latest CPI, the BSP reiterated that while inflation kept to within the target range of two percent to four percent in the first quarter due to negative base effects, it will breach it in the second and third quarter of the year because of adverse weather conditions such as the El Niño.
In addition, the risks to the inflation outlook remain tilted toward the upside such as higher transport charges, increased electricity rates, higher global oil prices, and implementation of a legislated increase in the minimum wage, said the BSP.
The BSP has been relying on the government’s non-monetary measures to curb supply side pressures on prices particularly since the El Niño weather is expected to last longer than originally expected. The adverse impact of the weather phenomenon on agricultural production will likely hike inflation above the target range from the second quarter.
For now, inflation upside risks continue to be the higher transport charges, increased electricity rates, higher oil and domestic food prices, and the additional impact on food prices of a strong El Niño episode, said the BSP.
As of the last Monetary Board policy meeting on Feb. 15, the BSP’s risk-adjusted inflation forecast for 2024 is 3.9 percent and 3.5 percent for 2025. This will be revised in the next policy meeting.
The market expects the BSP will still keep the 6.5 percent benchmark rate for some time. It is unlikely that the BSP will cut its benchmark rate ahead of the US Fed as this might lead to sharp exchange rate fluctuations. The peso is considered stable at the moment at P55 to P56 level vis-à-vis the US dollar.