Inflation might have resumed its downtrend in August due to lower pump prices, a stronger peso and more affordable rice, meat and fish, according to the latest forecast of the Bangko Sentral ng Pilipinas (BSP) that, if realized, would vindicate its decision to cut interest rates early.
In a statement on Friday, the BSP projected inflation last month to have settled between 3.2 and 4 percent, softer than the 4.4-percent price gains recorded in July.
READ: July inflation accelerates to 4.4% – PSA
That prediction of the central bank assumed that inflation likely returned to its 2- to 4-percent target range in August following a flare-up in July. The Philippine Statistics Authority (PSA) will release the official inflation data for August on Sept. 5.
“Higher electricity rates and higher prices for agricultural commodities, owing to unfavorable weather conditions, are the primary sources of upward price pressures for the month,” the BSP said.
“These factors are expected to be offset by lower domestic oil prices as well as lower rice, fish and meat prices along with the peso appreciation,” it added.
As it is, a slower August inflation would help the BSP justify its decision to slash the benchmark rate by 25 basis points (bps) to 6.25 percent at the Aug. 15 meeting of the policymaking Monetary Board (MB).
Borrowing costs
It was a move that unwinded previous tightening actions that had sent the policy rate to an over 17-year high in a bid to tame inflation. The action also made the Philippines one of the first Asian central banks to kick off their easing cycle ahead of the US Federal Reserve, which is widely expected to make its first rate reduction in September.
The BSP decided to reduce borrowing costs even as inflation breached its 2- to 4-percent target band in July. But monetary authorities said price growth was still projected to “trend downward” starting in August after the government further reduced the tariffs on rice, a major food staple of Filipinos.
The BSP also went ahead with easing even as the economy grew by 6.3 percent in the second quarter, which was flattered by favorable base effects that masked weakening consumption amid high rates.
BSP Governor Eli Remolona Jr. said the market can expect a “calibrated” shift to a less restrictive monetary policy, adding that another 25-bp rate reduction was possible either at the Oct. 17 or Dec. 19 meeting of the policymaking MB.
“Going forward, the Monetary Board will continue to take a measured approach in ensuring price stability conducive to [a] balanced and sustainable growth of the economy and employment,” the BSP said.