Higher chances seen for BSP rate cuts this year

The Bank of the Philippine Islands (BPI) said the Bangko Sentral ng Pilipinas (BSP) might reduce its current 6.5 percent rate by a total of 50 basis points this year, following lower inflation last month.

BPI chief economist Jun Neri said that move reflects stronger prospects of stabilizing inflation rates within the BSP’s target range of 2 to 4 percent.

“Inflation appears to have peaked for the year, likely remaining near the upper limit of the BSP’s target in July before a significant decline starting in August,” he said.

Significant growth

The BSP increases its rate when it sees significant growth in prices in the near term and does the opposite when prices start falling as a way to grow consumption of goods and services toward higher economic growth.

Inflation has declined to 3.7 percent in June from 3.9 percent in May as electricity rates dropped by nearly 14 percent, data from the Philippine Statistics Authority showed.

Power rates declined after the Energy Regulatory Commission announced staggered collection of generation costs from the wholesale electricity spot market over four months.

Meanwhile, rice prices slightly rose by 0.1 percent as the severe dry season caused by El Niño ended.

Neri said rice prices will likely decrease in the second half due to the implementation of a lower rice tariff of 15 percent from 35 percent starting this month.

“Back in 2019 when the Rice Tariffication Law was implemented, the resulting decline in rice prices shaved off up to 1.2 percent from inflation,” he said.

Neri said the BSP, however, will likely impose soft cuts in two rounds this year as vegetable prices can still increase while consumers continue to pay electricity.

“An upside risk to this outlook is the potential La Niña later this year. The price of food items like vegetables could go up if the rainfall is severe,” he said.

Meanwhile, power distributors will collect deferred charges under the staggered payment scheme until September.

Neri added global supply constraints and geopolitical tensions discourage the BSP from imposing aggressive rate cuts.

Weaker peso

While the peso weakened against the US dollar in the last week of June, Neri said the BSP could still consider cutting rates as foreign exchange affects inflation minimally.

“It seems this is a trade-off that the BSP is willing to tolerate for now. The pass-through will only become a concern if the inflation target is at risk again,” he said.

While a weaker peso makes imported goods costlier, BSP Governor Eli Remolona Jr. last month said the currency depreciation contributed just 0.2 percent to inflation since the peso in January started weakening.

This means 0.036 percent per 1 percent peso depreciation, he added.