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Inflation Update: BSP likely to hold off on cutting rates despite slowing inflation
June inflation was slower than market expectations. That is a welcome development. But still, food prices rose at a faster rate.
By Metrobank Research
The Philippines’ headline inflation rose slower-than-expected to 3.7% year-on-year (YoY) in June from 3.9% in May, driven by the slower-than-expected increase in prices of housing, water, electricity, gas, and other fuels. Year-to-June average inflation remained at 3.5%. Meanwhile, core inflation, which excludes selected food and energy items, remained flat at 3.1% YoY from May.
Rice prices (8.9% of CPI basket), which rose 22.5% YoY in June, remained the main contributor and are expected to remain elevated until July due to low base effects. Moreover, Metrobank Research expects lower rice tariffs to substantially slow headline inflation going forward.
On the recently approved PHP 35 wage hike in the National Capital Region (NCR), the PSA expects to see lag effects on services beginning September.
With the Year-to-June average inflation at 3.5%, we maintain our forecast average inflation range of 3.3%-3.6% in full year 2024, but now see an increased likelihood of settling towards the lower end of our range.
Despite the lower inflation path, we continue to believe the BSP will hold off on cutting policy rates until its October 17 meeting to support the peso. However, we acknowledge the risk of earlier policy action in the August 15 Monetary Board meeting should the July inflation print continue to surprise on the downside coupled with clearer dovish signals from the US Federal Reserve on its own easing cycle.
Inflation Update: Lower June inflation aligns with the BSP’s dovish signals
We maintain our forecast average inflation range of 3.3%-3.6% in full year 2024, but see the likelihood of inflation settling at the lower end of our range.
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