THE recent decision of the United States Federal Reserve to maintain its interest rates is not enough assurance that rate cuts are coming, according to the Bangko Sentral ng Pilipinas (BSP).
BSP Governor Felipe M. Medalla said that while yield curves are showing signs that the US Fed will cut rates in the short term, there are indications that given the longer-term data, rate cuts may not be expected.
Despite this, Medalla said the recent slowdown in the Philippine inflation rate to 6.1 percent in May 2023, the fourth consecutive decline for the year (https://businessmirror.com.ph/2023/06/06/inflation-in-may-slows-to-6-1-as-food-transport-energy-prices-decline/), will give the central bank a “reason to pause.”
“The most recent numbers [show] that the inflation rate is declining. Kitang-kita mo yung [You can clearly see the] trend.
Our expectations are by September or October, it will be below 4 [percent],” Medalla said. “It’s a good reason to pause.”
However, Medalla said, the BSP will remain vigilant considering the country’s history of experiencing certain events that could easily push up commodity prices.
Oxford Economics expects policymakers in the Philippines and South Korea to wait until the first quarter of 2024 or earlier to ease monetary policy.
It also noted that prices have been falling fast in the Philippines and Thailand compared to other countries in Southeast Asia.
“We know from experience that something can happen that could make the actual inflation lower or higher, our assessment is the probability of upward revision is higher than the probability of downward revision,” Medalla said.
One thing that Medalla noted was that given the narrow differential between US interest rates and Philippine interest rates, this could lead to a “knee-jerk” reaction for the peso to depreciate.
Based on the latest data, US interest rates were maintained at 5.25 percent while Philippine interest rates were also maintained at 6.25 percent.
This leads to a difference of less than the 200 basis points which the market considers “healthy” for the peso, preventing it from depreciating.
Medalla said if the peso depreciates based on this “knee-jerk” reaction, it will be difficult for the Philippines since inflation remains high. It can be noted that the country is a net food and oil importer.
Food accounts for 34.78 percent of the Consumer Price Index (CPI) for all households while electricity, gas and other fuels account for 6.74 percent of the basket. Transportation, which is also fuel-dependent, accounts for 9.03 percent of the CPI.
“The markets may see further reduction in the difference between the BSP and the policy rate as a signal for a weaker peso, which may not be a good thing at this point because inflation is still a problem. So this time, therefore, we have to be conscious about the interest rate differential but that is not the main driver. The main driver is the domestic inflation picture,” Medalla explained. “Huwag naman na knee-jerk reaction pagka nag-narrow, eh weak peso. [Because] these can become self-fulfilling prophecies eh.”
Earlier, Philippine Statistics Authority (PSA) data showed that inflation slowed in May to 6.1 percent from 6.6 percent in April 2023, but was still higher than the 5.4 percent posted in May 2022.
The rate in May 2023 was also the slowest in 12 months, when inflation in May 2022 was at 5.4 percent. Meanwhile core inflation was at 7.7 percent, which is a drop from the 7.9 percent in April 2023.
The PSA said Transport and Food inflation were the main reasons for the slowdown in the May 2023 inflation.
For its part, the National Economic and Development Authority (Neda) assured the public that a “coordinate and proactive monitoring system” is in place to keep food and energy prices within the target range amid the further easing of the country’s inflation to 6.1 percent in May 2023.