Inflation further cooled in May

MANILA, Philippines — Economists believe inflation further cooled for the fourth straight month in May from an eight-month low of 6.6 percent in April, giving monetary authorities more space to keep interest rates steady.

ING Bank senior economist Nicholas Mapa said that inflation would continue to cool on a year-on-year basis to six percent in May as favorable base effects push the headline number back toward the two to four percent target of the Bangko Sentral ng Pilipinas (BSP).

Mapa said core inflation likely eased to 7.5 percent in May from 7.9 percent in April.

According to Mapa, moderating inflation gives the BSP more space to maintain policy settings, but is unlikely to cut rates given the pressure on the peso.

“We expect the BSP to stand pat at their June meeting, given that inflation trends suggest it is back within target by the third or fourth quarter,” Mapa said.

Inflation eased steadily from a likely peak of 8.7 percent in January to 8.6 percent in February, 7.6 percent in March and 6.6 percent in April. It averaged 7.9 percent in the first four months of the year, still way above the two to four percent target range of the BSP.

Mapa pointed out, however, that the central bank may also consider a rate hike if the US Federal Reserve raises its interest rates in its meeting.

Mapa explained that BSP Governor Felipe Medalla gave explicit forward guidance to help foster financial market stability, based on latest available data, but also indicated that he could and would change course should new data or developments manifest.

Security Bank chief economist Robert Dan Roces also said inflation likely settled at six percent, with a range of 5.8 to 6.2 percent in May on the back of tempering food prices amid government interventions and imports.

However, Roces said that strong demand for certain goods and services, which has also put upward pressure on prices, may cause core inflation to remain elevated and above the headline.

UnionBank chief economist Ruben Carlo Asuncion also believed inflation settled at six percent in May and is expected to hit 3.5 percent by the end of the year as base effects show up and compress the rates in the second half of the year.

The Aboitiz-led bank lowered its inflation forecast for this year to 5.7 percent from the original target of 6.2 percent.

“Despite an expected path of sharply decelerating headline inflation, the core inflation, which accounted for the bulk of headline CPI, will fade progressively in 2023 but will still end the year above the BSP’s inflation target range,” Asuncion said.

According to Asuncion, core inflation may settle at 4.9 percent by the end of the year from about 7.5 percent in May, implying that processed foods, alcoholic beverages and cigarettes, meals taken outside the home, and other key services will not undergo a swift correction to the downside considering a steady demand from consumers in the middle-income class and up, alongside gradually moderating pass-through effects as inflation expectations wind down.

After pausing for the next two rate-setting meetings and lowering the reserve requirement rate , Asuncion said the BSP may cut rates toward the end of the year as more disinflation happens in the next months.

Rizal Commercial Banking Corp. chief economist Michael Ricafort, and Philippine National Bank economist Alvin Arogo are both convinced that inflation likely slipped to 6.1 percent in May from 6.6 percent in April.

Ricafort believes easing trend in year-on-year inflation is expected for the coming months to about five to six percent from May to June ; four percent from July to September; and three percent from October to December.

Ricafort said inflation is seen in the two percent range or even lower in the first quarter of 2024 largely due to higher base effects.

“After the latest pause in local policy rates, the markets are now anticipating a possible cut in banks’ reserve requirement ratio, as early as June 2023, as signaled recently,” Ricafort said.

After a year-long tightening cycle that saw a cumulative rate hike of 425 basis points to tame inflation and stabilize the peso, the BSP took a prudent pause as it kept key policy rates on hold during its rate-setting meeting on May 18.

Arogo said inflation likely eased further to 6.1 percent in May as favorable base effects would continue to be the main driver for inflation to decelerate despite increases in some important consumer price index items, like electricity costs in areas serviced by Manila Electric Co.

“The continued slowdown in inflation will support another pause during the policy rate meeting in June,” Arogo said.

China Bank chief economist Domini Velasquez said inflation likely settled at 6.2 percent last month as higher food prices offset declines in non-food items.

In particular, Velasquez said rice, meat, and vegetable prices were higher in May but was somewhat offset by lower prices of fish, chicken and eggs.

She added that it looks like price increases in regions increased much more than in Metro Manila.

“Moving forward, we expect lower annual inflation rates per month until it reaches the BSP’s target in November. Currently, we estimate inflation to settle at 5.8 percent, higher than the BSP’s revised projection of 5.5 percent for 2023,” she said.

Velasquez pointed out that higher food inflation is still at risk due to El Nino and shortages in food items, while minimum wage hikes are also expected this year due to elevated inflation in the past two years.

Pantheon Macroeconomics chief economist for emerging Asia Miguel Chanco said in an email inflation likely further decelerated in May to six percent. — Louella Desiderio