The country’s inflation rate may have peaked this year after the rice tariff cut was implemented, analysts have suggested.

In its June inflation report, the Bank of the Philippine Islands (BPI) stated that the July inflation data will likely remain near the upper limit of the Bangko Sentral ng Pilipinas’ (BSP) before posting a significant decline in August.

This positive outlook was attributed to the expected recovery in rice production in the second half of the year and the 15 percent reduction in tariffs on rice this month.

“Back in 2019, when the Rice Tariffication Law was implemented, the resulting decline in rice
prices shaved off up to 1.2 percent from headline inflation,” it said.

For Robert Carnell, ING’s Asia-Pacific head of research, the tariff cut will take more than one month and is unlikely to be fully transmitted.

“Nonetheless, we could well see inflation drop to the low one percent level in the coming months, before slowly rising back towards the underlying core inflation rate of around three percent in early 2025,” he said.

Last Friday, the BSP said the decrease in the tariff on rice imports would help mitigate supply-related inflationary forces and sustain the disinflation trajectory.

For this reason, BSP said it supports President Marcos’ executive order (EO) no. 62, lowering the tariff on rice imports from 35 percent to 15 percent. 

“The Monetary Board supports the National Government’s implementation of the reduction in the tariff on rice imports to address supply-side pressures on prices and sustain the disinflation process,” the BSP said.

With the June inflation print and expected decline in the coming months, Carnell said that policy rate cuts could be possible in August. Still, the depreciation of the peso may be a major constraining factor.

“This will certainly be easier to achieve if it comes against a backdrop of solid growth yet moderating inflation. For now, we are assuming that this is achieved and are penciling in a 25 basis point cut in 3Q24,” he added.

Another limiting factor to the policy rate cuts is the growth of the foreign debt outpacing the increase in foreign reserves, the BPI said, which results in a lower FX reserves-to-debt ratio.

“Cutting interest rates aggressively would make the build-up of FX reserves more challenging, which may lead to a further deterioration in the external position,” it further said.

BPI also said the prevailing global supply constraints and geopolitical tensions might limit the BSP's room for significant rate reductions.

"We only expect two rate cuts this year from 6.5 percent to 6.0 percent,” it said.