BSP sees significantly lower inflation in May

BSP Governor Felipe M. Medalla on Monday told reporters inflation is rapidly easing year on year due to high base effects.

“Year on year, (May inflation) will clearly be significantly lower because of its high base (5.4% in May) last year. So, unless there are new shocks or developments, by October or September, inflation will be below 4%,” he said in mixed English and Filipino on the sidelines of a general membership meeting of the FinTech Alliance.

Inflation has been on a downtrend since hitting 8.7% in January. It cooled to 6.6% in April from 7.6% in March, but it was faster than 4.9% a year ago.

For the first four months of the year, average inflation stood at 7.9%. This is still higher than the central bank’s 5.5% full-year forecast and 2-4% target. 

The Philippine Statistics Authority is scheduled to release its May inflation data on June 6.

Mr. Medalla said high base effects would likely affect inflation in 2024.

“The most extreme will be in January. Inflation may reach below 2% not because prices are low by January next year, but it’s because of the high base. January (2023) was the worst month in terms of month-on-month inflation,” he said.

Inflation hit a 14-year high of 8.7% in January, accelerating from 8.1% in December as food prices soared amid supply issues. Month on month, inflation climbed to 1.7%.    

Mr. Medalla also noted that the impact of supply shocks is beginning to wane, and monetary policy tightening would bring inflation “back to normal.”

At its policy meeting on May 18, the Monetary Board kept its benchmark interest rate unchanged at 6.25%. This was after raising policy rates by 425 basis points (bps) since May last year to tame inflation.   

Meanwhile, MUFG Global Markets Research Senior Currency Analyst Michael Wan said Philippine inflation is expected to ease below 4% by yearend, before averaging by 5.6% this year and 3.9% in 2024.   

Both of these forecasts are higher than the central bank’s 5.5% projection in 2023 and 2.8% for next year.

“We have likely seen the worst of the domestic food supply constraints, as the administration has shown a greater willingness to import,” Mr. Wan said in a note.

President Ferdinand R. Marcos, Jr. has approved imports of up to 150,000 tons of sugar, while the Department of Agriculture is also considering importing more onions this month. 

“Moving forward, we also expect core inflation components to moderate as we have likely seen the worst of the reopening effects on domestic price pressures,” Mr. Wan said.   

Core inflation, which discounts volatile prices of food and fuel items, slowed to 7.9% in April, from 8% in March which was the highest since December 2000. 

However, risks to the inflation outlook are on the upside and inflation might remain sticky in 2024, Mr. Wan said. 

Further delays in food imports could lead to another spike in food prices, he added. A possible hike in wages and transport fares may also push core inflation higher this year.

Policy and RRR cut?
MUFG’s Mr. Wan expects the BSP to keep rates on hold at 6.25% before cutting rates by 75 bps starting the fourth quarter of 2023.

“(We) think the lower trajectory for headline inflation, coupled with our expectation for the Fed to start cutting rates over the next 12 months, should give BSP policy space to lower its key reverse repo rate starting fourth quarter of 2023. We see the BSP’s policy rate at 5.5% by the first half of 2024, from 6.25% currently,” he said.

He also expects the BSP to cut big banks’ reserve requirement ratio (RRR) by 200 bps to 10%, from 12%.

“This is in part to offset some of the pandemic loan support to micro, small, and medium enterprises that BSP provided through banks, including the utilization of these loans as compliance with reserve requirements,” Mr. Wan said.   

The RRR for big banks is one of the highest in the region. Reserve requirements for thrift and rural lenders are at 3% and 2%, respectively.

The central bank targets to cut the RRR to single-digit levels by the end of the year. — By Keisha B. Ta-asan