Bangko Sentral ng Pilipinas (BSP) Governor Eli Remolona Jr. on Tuesday said the Monetary Board may cut its policy rate “less likely” this month as July inflation of 4.4 percent was “worse than expected.”

The latest inflation surpassed the lower end of the BSP’s forecast range of 4 to 4.8 percent.

However, the BSP governor stressed that July inflation was still “not too bad” and that the BSP Monetary Board has yet to wait for the announcement of the gross domestic product (GDP) level in the second quarter before making a conclusive monetary policy decision.

“It’s worse than expected. But the 4.4 percent inflation reflected the base effect’s contribution of 0.3. Without the base effect, inflation would be 4.1 percent,” Remolona said.

“Easing the policy rate is less likely because inflation was still high. But we have to look at other numbers,” he continued.

The base effect comes from comparing figures recorded in certain periods. Economists say a significantly low inflation rate signals a higher rate over some time. This effect diminishes after inflation rates have moved relatively stable.

PSA data

Data from the Philippine Statistics Authority showed inflation hit 4.4 percent last month, up from 3.7 percent in June and 2.8 percent in January. Inflation stayed within 3.4 to 3.9 percent between February and May.

The PSA will release data on second-quarter GDP on Thursday, while the BSP Monetary Board will announce any adjustment to its 6.5 percent policy rate on 15 August.

The BSP keeps its policy rate high to prevent inflation spikes, but this also limits economic or GDP growth as consumers and businesses restrain spending amid high loan interest rates.

“If the GDP is unexpectedly weak, then it looks like our expectations suggest lower inflation going forward. In that case, we can cut the policy rate,” Remolona said.

Rate may be maintained

In his view, Rizal Commercial Banking Corp. chief economist Michael Ricafort said the BSP might maintain its rate “after three higher-than-expected data.”

Meanwhile, Security Bank chief economist Dan Roces said it will be a “close call between maintaining the current policy rate and implementing a 25-basis point cut.”

He said the BSP will also have to consider core inflation or the prices of most goods and services or non-volatile items like food and fuels.

“The BSP has indicated that inflation may have peaked in July, opening the door for a potential rate cut. The continued deceleration of core inflation suggests that underlying price pressures are gradually easing,” Roces said.

“Ultimately, the central bank will seek to carefully balance the risks of inflation persistence against the need to support economic growth,” he continued.