The door opened further for a possible pause in the tightening cycle of the Bangko Sentral ng Pilipinas (BSP) as early as next month after inflation cooled to a six-month low of 7.6% in March from 8.6% in February.
Photo Insert: The central bank said that the balance of risks to the inflation outlook for 2023 and 2024 also continues to tilt significantly toward the upside.
ING Bank senior economist, Nicholas Mapa, said inflation may ease further in the coming months after hitting a fresh 14-year high of 8.7% in January. “We expect inflation to moderate further in April, which could open up the door for a BSP pause at the May meeting,” Mapa said.
The next rate-setting meeting of the Monetary Board is scheduled on May 18. Inflation averaged 8.3% from January to March, well above the BSP’s two-to-four percent target range.
The growth in the consumer price index last month was the lowest since the 6.9% recorded in September last year.
The BSP has so far raised its key policy rates by 425 basis points to tame inflation and stabilize the peso that slumped to an all-time low of P59 to $1 last October. This brought the overnight reverse repurchase rate to a 16-year high of 6.25% from an all-time low of two percent.
Mapa said BSP Governor Felipe Medalla had previously mentioned that he may consider a pause at the next policy meeting should prices begin to fall and should headline inflation show signs of heading back to target convincingly.
“The inflation reading (in March) could be one additional data point that could convince Governor Medalla that inflation is finally moderating,” Mapa said. However, Bank of the Philippine Islands lead economist, Jun Neri, said core inflation accelerated further to eight percent in March, the highest since 2000, from 7.8 percent in February.
“Despite the decline in the headline print, core inflation hasn’t caught up yet. This means that second-round inflation is not over yet and inflationary pressure from demand remains significant,” Neri said.
Neri said the latest headline print has provided an additional reason to conclude that inflation has already peaked, but the question right now is how fast it can return within the central bank’s two to four percent target range.
“The rise in core inflation may justify another rate hike in the next Monetary Board meeting. Additional monetary tightening will also hasten the process of bringing down inflation back to the target of the BSP,” he said.
The central bank sees inflation returning to within target as early as October and may settle at an average of six percent this year before easing to 2.9% in 2024.
According to Neri, the inflation story may become favorable in the second half, barring any global commodity price shocks and provided that non-monetary measures prove effective in normalizing the food supply situation in the country.
“It is only by then that we think the BSP could reasonably consider reassessing its tightening campaign. Moreover, further tightening may help the central bank rebuild its external buffers after having lost so much in 2022,” Neri said.
Neri explained that rate cuts may be justified if a comfortable buffer can be achieved and if month-on-month changes in core and headline CPI fall to 0.2 percent or lower for at least three straight months.
Meanwhile, the BSP said the inflation outturn in March is consistent with the overall assessment that inflation will remain elevated over the near term before gradually decelerating back to the target range toward end-2023.
The central bank said that the balance of risks to the inflation outlook for 2023 and 2024 also continues to tilt significantly toward the upside.
“The effect of supply shortages on domestic food prices remains a concern, while the potential impact of higher transport fares, increasing electricity rates, as well as above-average wage adjustments in 2023 point to the broader-based nature of price pressures. On the downside, the impact of a weaker-than-expected global economic recovery continues to be the primary factor that could dampen inflation,” it said.