HSBC still expects the Bangko Sentral ng Pilipinas (BSP) to cut its policy rate by 25 basis points to 6.25 percent this month, stressing the higher inflation in July is temporary and largely palpable only in Metro Manila.

The monetary policy forecast came after BSP Governor Eli Remolona Jr. on Tuesday said the central bank might keep its 6.5 percent benchmark for private banks due to higher July inflation of 4.4 percent from 3.7 percent in June.

“Not only was the spike in inflation caused by a traceable event that affected the economy’s supply, the majority of the spike was also concentrated in just one region,” HSBC economist Aris Dacanay said Wednesday.

Specifically, inflation in Metro Manila rose from 2.3 percent in June to 5.6 percent last month on an annual growth basis. Meanwhile, prices outside this area grew slower from 4.1 percent to 4.4 percent.

Dacanay said higher electricity rates in Metro Manila mainly contributed to the overall inflation as power distributors collected delayed fees among consumers last month under an installment scheme ordered by the Energy Regulatory Commission.

Power fees

The order covers higher power generation fees and is applicable until September only.

As a result, electricity prices in the cities jumped to 5.6 percent in July from 2.3 percent in the same month last year.

Aside from power rates, Dacanay said rice prices also increased in the cities following typhoon “Carina.”

“Food prices, especially in Metro Manila, rose due to the flooding caused by typhoon “Carina.” The floods took a toll not just on the supply of food, but also in logistical costs,” he said.

Dacanay is optimistic that the recent government order to reduce tariff on imported rice from 35 percent to 15 percent will bring down overall food inflation.

He said the lower tariff could free up around 20 percent of Filipinos’ household budget for other expenses as imports boost rice supply.

“The rice tariff rate cut is expected to eventually cool prices significantly,” he said.

In broad perspective, Dacanay said prices of most goods and services nationwide have fallen which signals a manageable inflation trajectory or within the BSP target of 2 to 4 percent.

“These reasons were supply-side reasons for the spike. We also do not think there is enough concern on the demand-side that would build the case for a rate pause next week,” he said.

The BSP keeps its policy rate elevated to prevent inflation spikes by restraining household consumption.

Data from the Philippine Statistics Authority on the country’s gross domestic product showed household spending already grew slowly to 4.6 percent in the first quarter from 6.3 percent in the same period in 2023 amid high interest rates.