Central bank sees July inflation at 4.1%-4.9%

Headline inflation likely settled within the 4.1% to 4.9% range in July due to lower electricity rates, rollback in cooking gas prices, and a stronger peso, the Bangko Sentral ng Pilipinas (BSP) said.

“Lower electricity rates, declines in the prices of meat, fruits, and fish items, the rollback in LPG prices, and the peso appreciation could contribute to downward price pressures during the month,” the central bank said in a statement on Monday.   

Last month’s inflation likely slowed from the 5.4% print in June and the 6.4% logged in July 2022.

If realized, July would be the first time that inflation would fall below 5% since the 4.9% logged in April 2022.

At the lower end of the BSP forecast, 4.1% would be the slowest pace recorded in 15 months or since the 4% recorded in March 2022. 

July would mark the sixth straight month of easing inflation since the peak of 8.7% in January, and the 16^th consecutive month inflation exceeded the BSP’s 2-4% target band.

A BusinessWorld poll of 17 analysts last week yielded a median estimate of 4.9% for July inflation, settling at the upper end of the BSP’s 4.1-4.9% forecast for the month.      

The BSP cited lower electricity rates and a reduction in cooking gas prices as factors that may have contributed to the downtrend in inflation.

Manila Electric Co. lowered the overall rate for a typical household by PHP 0.72 to PHP 11.18 per kilowatt-hour in July.

Fuel retailers slashed their cooking gas prices by P3.70 per kilogram in July, marking the second consecutive month of price cuts.   

“Meanwhile, higher prices of rice and vegetables as well as higher domestic oil prices are the primary sources of upward price pressures in July,” the BSP said.

In July alone, pump price adjustments stood at a net increase of P2.35 per liter for gasoline, P2.60 per liter for diesel, and P1.80 per liter for kerosene.     

“Going forward, the BSP will continue to monitor developments affecting the outlook for inflation and growth in line with its data-dependent approach to monetary policy formulation,” the central bank added.

The BSP expects inflation to further ease in the next few months, reaching the 2-4% target by the fourth quarter this year. It sees inflation averaging 5.4% for this year and 2.9% for 2024, before picking up to 3.2% in 2025. 

Meanwhile, Moody’s Analytics gave a 5.2% July inflation forecast for the Philippines due to the high base effects and lower power rates.

“However, a hike in fuel prices in end-July and elevated prices of key food items like onions and well-milled rice, staples in Filipino cuisine, will add friction to the descent path,” Sarah Tan, an economist from Moody’s Analytics, said in an e-mail.

Based on data from the Department of Agriculture, prices of local well-milled rice rose to as much as P49 per kilogram in end-July. Prices of red and white onions increased to as much as P180 per kilogram.   

“Should July’s print support the downward trend in inflation observed since January, that will give the BSP confidence to extend its pause on the tightening cycle at the Monetary Board’s next meeting in August,” Ms. Tan said.   

At its meeting in June, the Monetary Board extended its pause, keeping the key interest rate at 6.25%. This was after the BSP hiked borrowing costs by a total of 425 basis points (bps) from May 2022 to March 2023.   

“For the rest of 2023, risks to inflation include food supply problems, transport fares and minimum wage adjustments, as well as the potential El Niño weather pattern that could surface in the second half of the year, disrupting domestic supply and put upward pressure on food prices,” Ms. Tan added.   

The El Niño weather event will likely persist until the first quarter next year, according to the state weather agency. The weather pattern may cause dry spells and droughts in some areas in the country.   

Security Bank Corp. Chief Economist Robert Dan J. Roces said headline inflation likely slowed to 4.7% in July.

He said the BSP will keep a close eye on inflation trends and the factors that influence it, particularly the impact of El Niño and hikes in wages and transport fares.

On July 16, a P40 minimum wage hike took effect in the National Capital Region. There are also pending wage hike petitions in other regions of the country, which will likely be resolved by September.

Meanwhile, the Department of Transportation approved petitions to raise ticket prices at the Light Rail Transit Lines 1 and 2 (LRT-1 and LRT-2), which will be implemented on Aug. 2. Single-journey tickets at LRT-1 and LRT-2 can now reach as much as P35 per ticket.

“If inflation starts to rise beyond desired levels, [the BSP] will consider implementing appropriate monetary policy measures to control inflation and stabilize the economy,” Mr. Roces said.

“The central bank may opt to do an insurance hike as well, with risks to the interest rate differential from US Fed policy actions and the aforementioned risks providing upsides to the inflation trend,” he added.

The US Federal Reserve hiked its own policy rate by 25 bps to 5.25-5.5% last week, which marked the highest level in more than two decades.   

BSP Governor Eli M. Remolona said the central bank remains vigilant against risks to the inflation outlook, as inflation is still a pressing challenge to the country.   

The Monetary Board’s next policy review is scheduled on August 17. — Keisha B. Ta-asan