Chinabank sees cautious BSP policy despite May inflation

Chinabank expects the Bangko Sentral ng Pilipinas (BSP) to remain vigilant in adjusting its policy rate amid proposals of higher minimum wage, elevated prices of some food items, and tensions between the US and Iran.

The private bank still projects the BSP to cut its policy rate by 25 basis points to 5.25 percent on 19 June after local inflation eased further last month.

"However, the BSP will likely remain cognizant of persisting upside risks to the inflation outlook, including upticks in food prices and the proposed legislated wage hike," an analysis from Chinabank said.

The country's overall inflation slowed to 1.3 percent in May from 1.4 percent in April, resulting in an average of 1.9 percent in the first five months of the year based on data from the Philippine Statistics Authority. All the figures settled below the BSP's minimum target of 2 percent.

"Similarly, softer inflation was recorded for restaurant and accommodation services at 2 percent from 2.3 percent, though an upside risk for this commodity group is the recent increase in the prices of some key food items," Chinabank said.

While rice prices fell further by nearly 13 percent, prices of meat increased by 7.9 percent and eggs by 9.8 percent. Fish prices also rose by 5.7 percent and vegetables were sold higher by 3.4 percent.

Chinabank said overall inflation might accelerate if inflation control measures are not enhanced and the proposal from some lawmakers to impose a P200 hike in minimum wage for private-sector workers becomes a law.

"This is double the P100 hike approved by the Senate last year. The Philippine Statistics Authority noted that minimum wage hikes usually lead to an increase in services inflation," the bank said.

Makati Business Club chairman Edgar Chua echoed the bank's opinion.

"If we don't address the prices of basic goods, there will be continuing pressure to keep increasing wages, which is not only inflationary but also makes us less competitive versus other ASEAN countries," Chua said.

Instead, he suggests to lawmakers to consult with the Regional Wage Boards to conduct deeper studies of market prices in individual regions of the country.

"There is an existing mechanism to address this, which are regional wage boards that take into account the cost of living in the particular area. There is no compelling reason for Congress to bypass these wage boards, as it has in this instance," Chua said.

Chinabank added that the BSP will likely continue to monitor geopolitical tensions between the US and Iran.

The Trump administration has been pressuring Iran to reduce or even stop its enrichment of uranium under its nuclear program which the US officials said can be used for war.

"An escalation in geopolitical tensions between Russia and Ukraine, and the US and Iran could drive up oil prices, though gains may be capped by OPEC+’s output hikes and by concerns over oil demand amid trade conflicts," the bank's analysts said.

Global media firms reported that Iranian Supreme Leader Ayatollah Ali Khamenei announced last Wednesday that his country will not scrap its uranium enrichment.

Following his remarks, prices of US-sourced WTI Crude Oil already rose by 1.91 percent while Europe's Brent Crude grew by 1.74 percent based on data from Bloomberg. These prices rebounded from a 3 percent decline last month when US President Donald Trump said the government was close to securing a deal with Iran.