Above-target inflation seen likely in May

MANILA, Philippines — Inflation may have breached the government’s target in May, as upward price pressures from costly electricity and vegetables were worsened by the pass-through effects of a bearish peso, the Bangko Sentral ng Pilipinas (BSP) said on Friday.

In a statement, the BSP said last month’s inflation rate might have settled between 3.7 and 4.5 percent.

If the figure on June 5 would hit the upper limit of the BSP’s forecast range, the price increase in May would be faster than the 3.8-percent pace recorded in April. The figure would also breach the 2 to 4 percent target band of the BSP after staying within that range for five straight months.

READ: April inflation quickens to 3.8%, still within target range

The central bank said there were “continued increases” in electricity rates and vegetable prices amid the El Niño weather phenomenon, which can destroy crops and push up demand for air-conditioning.

A weak peso, which had fallen to 19-month lows, further fueled inflation by making imports of consumer and capital goods more expensive. Data showed that the local currency had depreciated by over 1 percent month-on-month in May.

But the BSP said other key consumer items had posted lower prices in May.

“Meanwhile, lower prices of rice, fish, and fruits as well as lower domestic oil and LPG (liquefied petroleum gas) prices could offset the upside price pressures,” it said.

Two rate cuts in 2024 possible

BSP Governor Eli Remolona Jr. had said inflation would likely peak in May before starting to soften as unfavorable base effects begin to fade.

READ: BSP hints at policy rate easing by August

For that reason, Remolona floated the possibility of two 25-basis point rate cuts this year—with the first one likely in August and ahead of the US Federal Reserve—as he also acknowledged that liquidity conditions were now tighter than necessary after the modest economic growth in the first quarter.

At its meeting last month, the Monetary Board, the highest policymaking body of the BSP, kept the key rate at a 17-year high of 6.5 percent. Analysts said the Philippines and other Asian central banks, including those of Thailand, Vietnam, and Korea, can afford to focus more on local developments than the actions of the Fed in determining their next policy moves.

“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 decision-making,” the central bank said. INQ