BSP sees room to keep rates steady

The Philippine central bank would probably keep policy settings on hold given “evolving inflation conditions,” Governor Eli M. Remolona, Jr. said on Monday, even as he signaled a less restrictive stance if price pressures continue to ease.

“Evolving inflation conditions show that the BSP (Bangko Sentral ng Pilipinas) can hold its policy settings steady for the time being,” Mr. Remolona said during a Development Budget Coordination Committee (DBCC) briefing before the House Committee on Appropriations on Monday.

“If price pressures continue to ease, it will be possible for the BSP to consider a less restrictive monetary policy stance.”

In June, the BSP kept policy rates unchanged at an over 17-year high of 6.5% for a sixth straight meeting. Mr. Remolona has previously signaled that the central bank is on track to cut rates by August, possibly by 25 basis points.

The Monetary Board’s next rate-setting meeting is on Aug. 15.

Mr. Remolona said lingering supply concerns and geopolitical tensions warrant continued and close monitoring of risks to the inflation outlook.

Headline inflation likely accelerated to 4% in July, according to a BusinessWorld poll of 15 analysts conducted last week, mainly due to high food and electricity prices.

If realized, this could mark the eighth straight month that inflation settled within the BSP’s 2-4% target band.

July inflation data will be released today (Aug. 6).

Mr. Remolona said the balance of risks to the inflation outlook has tilted to the downside mainly due to the recently approved tariff cut on rice imports.

“In the BSP’s latest forecast, the rice tariff reduction will have a very significant downside impact on the inflation trajectory until 2025,” he added.

In June, President Ferdinand R. Marcos, Jr. signed Executive Order No. 62, which slashed tariffs on rice imports to 15% from 35% previously, until 2028.

This is part of a reduced tariff regime for other agricultural products such as pork and corn intended as inflation-containment measures.

Mr. Remolona said the recent order will be “helpful in our efforts to tame inflation.”

“Since August 2023, however, inflation has been dominated by rice prices. If inflation were driven just by demand, there would be a more even distribution of these different components of inflation.”

“Our survey showed that when people worry about higher prices, when we ask them why, over 90% will say it’s because of the price of rice,” he added.

Rice inflation eased to 22.5% in June, marking the third straight month of slower rice inflation. Rice accounted for almost half of overall inflation during the month.

As of Aug. 2, the price of a kilogram of well-milled rice averaged PHP 48-P55 from PHP 41-PHP 49 in the same period a year ago. Regular-milled rice averaged PHP 45-PHP 55 from PHP 37-PHP 44 a year earlier.

“Indeed, there is strong empirical evidence that suggests that rice prices affect inflation expectations to a very large extent. And these inflation expectations lead to second-round effects,” Mr. Remolona said.

Meanwhile, Mr. Remolona said he sees inflation settling within the 2-4% target this year and in 2025, as well as inflation expectations remaining “well-anchored.”

However, he still cited upside risks to this outlook.

“These risks will come from higher domestic prices of food items other than rice, from transport charges, and from electricity rates,” Mr. Remolona said.

National Economic and Development Authority Secretary Arsenio M. Balisacan also cited other factors that could stoke inflation, such as wage adjustments.

“Risks related to inflation, such as potential adjustments in fare, wage, and service utility fees, have the potential to significantly curb spending. It is imperative that we carefully consider these factors in our economic planning and decision-making processes,” he told lawmakers.

Last month, the Regional Tripartite Wages and Productivity Board approved a PHP 35 minimum wage hike for workers in the National Capital Region, which took effect on July 17.

Programs like Pambansang Pabahay Para sa Pilipino Housing (4PH) may also have unintended inflationary impacts, Mr. Balisacan said.

“The projected rapid economic growth, particularly with the implementation of the 4PH program, could lead to upward inflationary pressures and stall economic gains.”

The 4PH is the government’s flagship housing program. The government seeks to build a million housing units yearly under the program until 2028. – Luisa Maria Jacinta C. Jocson, Reporter