Philippines: Inflation may ease to 3.9% by yearend

MANILA, Philippines — Headline inflation may ease further to 3.9 percent toward the end of the year, which may prompt the Bangko Sentral ng Pilipinas (BSP) to cut interest rates as early as the fourth quarter, according to MUFG Global Markets Research.

In a report, MUFG said inflation may drop below the BSP’s two to four percent target range by the end of the year.

Inflation eased to a 12-month low of 6.1 percent in May from 6.6 percent in April and a peak of 8.7 percent in January, driven by lower food and energy prices.

Inflation averaged 7.5 percent in the first five months, still above the central bank’s two to four percent target.

“Nonetheless, given the importance of food in the Philippines’ CPI basket, coupled with the fading of food supply shocks in 2023, we do expect the Philippines inflation to moderate closer to 3.9 percent year-on-year by end-2023,” MUFG said.

The Japanese bank said the inflation downtrend over the past four months gives the BSP more space to reverse its tightening cycle by cutting key policy rates as early as the fourth quarter.

“This should give the BSP policy space to cut its key policy rate from the fourth quarter of 2023,” it said.

The BSP raised key policy rates by a cumulative 425 basis points during its year-long tightening cycle that started in May last year to tame inflation and stabilize the peso that slumped to a record low of 59 to $1 in October last year.

This brought the benchmark interest rate to a 16-year high of 6.25 percent from an all-time low of two percent.

With the inflation downtrend and the stronger-than-anticipated gross domestic product (GDP) growth in the first quarter, the BSP decided to take a prudent pause as it kept key policy rates unchanged on May 18.

It also lowered its inflation forecasts to 5.5 percent from six percent for this year and to 2.8 percent from 2.9 percent for next year.

For its part, MUFG sees inflation easing to 5.6 percent this year and 3.9 percent next year from 5.8 percent last year.

MUFG is expecting the central bank to cut interest rates by 75 basis points starting the fourth quarter of this year until the overnight reverse repurchase rate hits 5.50 percent in the first half of 2024.

It is also expecting the BSP to bring down the reserve requirement ratio (RRR) for big banks to 10 percent in the third quarter from the current level of 12 percent.

The Japanese bank sees the peso ranging between 53.50 and 56.50 to $1 in the third quarter from 54 to 57 in the second quarter of the year

“The Philippines peso traded somewhat mixed against the dollar in May, performing better in the first half before weakening more in the second half. The key macro event was certainly the BSP monetary policy meeting, where the central bank kept rates on hold,” MUFG said.

Meanwhile, it said March imports bounced up with a smaller contraction of 2.7 percent from 11 percent, driven by the resumption in capital goods imports.