June rate hike might be last as ‘worst is over’ for Philippine inflation

THE BANGKO SENTRAL ng Pilipinas’ (BSP) tightening cycle may end up short lived as the surprise easing of inflation in May signals that the “worst is over” for price shocks, Pantheon Macroeconomics said.

Pantheon Macroeconomics said the central bank might just deliver a second straight 25-basis-point (bp) hike next week before standing pat for the remainder of the year.

“Arguably, the door is now even ajar for the (Monetary) Board to stand pat next week,” Pantheon Macroeconomics Chief Emerging Asia Economist Miguel Chanco and Asia Economist Meekita Gupta said in a report on Tuesday.

The Monetary Board will hold its next policy review on June 18.

“We’ve loudly been on the dovish side of this debate from the get-go, but we now expect a final 25-bp increase next week, even though the CPI (consumer price index) result was good,” they added.

This followed the weaker-than-expected inflation reading in May, which cooled to 6.8% from 7.2% in April.

“This is the first deceleration in six months — suggesting that the worst is over — also undershooting the BSP’s 7.1-to-7.9% estimate,” Mr. Chanco and Ms. Gupta said.

For Mr. Chanco and Ms. Gupta, this means that any aggressive monetary policy action, including an off-cycle move and a 50-bp hike in a single meeting, is likely off the table.

The Monetary Board began a fresh tightening cycle in April as it delivered a 25-bp rate hike to 4.5%, which it said was meant to prevent broader spillover effects and keep inflation expectations anchored.

BSP Governor Eli M. Remolona, Jr. has remained hawkish since their April meeting, even saying last month that the Board is considering an off-cycle rate hike.

The central bank likewise maintained its inflation-targeting stance as it reaffirmed last week that it will take all necessary measures to bring inflation back to its 3% target.

Pantheon Macroeconomics now sees Philippine inflation averaging 5.5% this year and 3.2% next year. These are slower than its previous estimate of 5.9% and 3.6%, respectively.

However, Mr. Chanco and Ms. Gupta noted that raising the key policy rate above 4.75% could harm an economy already grappling with energy shocks and still recovering from last year’s flood control mess fallout.

“We continue to believe that any additional tightening would be rash, not least because the country’s core measure still includes a lot of food and oil-sensitive components that cloud the picture. But the economy is in no shape to swallow arguably unnecessary hikes; recall the abysmal Q1 GDP (gross domestic product) result,” the Pantheon economists said.

Mr. Remolona earlier noted that they are hopeful the government’s fiscal measures will help the economy rebound as they focus on taming inflation. 

His remark came after oil shocks and the lingering effects of the flood control controversy led the economy to slump anew in the first quarter, with GDP growth easing to 2.8% from 3% in the fourth quarter and 5.4% a year ago.

TERMS-OF-TRADE SHOCK
Meanwhile, Fitch Ratings said large net oil importers like the Philippines continue to bear the brunt of the Middle East conflict, which are facing an adverse terms-of-trade shock.

“Some of the largest net oil importing countries (as a share of GDP) are in south and south-east Asia, including Korea, Pakistan, the Philippines and Thailand,” Fitch Ratings Chief Economist Brian Coulton and Director for Economics Group Alex Muscatelli said in a June 4 report.

“Large net oil importers will suffer the biggest adverse terms-of-trade shock, and there has been a close correlation between the size of net oil imports and currency depreciation since the oil crisis began,” they added.

The Philippines imports over 90% of its oil from the Middle East, which made the war’s impact on oil trade and prices more severe for the economy.

Since Feb. 28, the country saw local oil prices soar, with its reserves dwindling as trade disruptions dragged on.

In the same report, Fitch Ratings cut its growth forecast for emerging markets, excluding China, to 3.2% from 3.4% for this year.

This, as Mr. Coulton and Mr. Muscatelli noted that emerging economies such as the Philippines will encounter major inflationary pressures from the oil crisis amid the US-Israel war on Iran.

“Again, emerging markets seem most at risk given the larger inflationary impact and monetary policy has already been tightened in several Asian economies, including Indonesia, the Philippines and Sri Lanka,” they said.

Still, Fitch expects emerging economies to slightly recover with a 3.4% growth from 2027 to 2028. — Katherine K. Chan