Angelo Taningco
Economist, Treasury Group

Philippine headline CPI inflation accelerated to a record-high 5.2% yoy in June, eclipsing market expectations and government projections. We think inflation’s upward trajectory will remain evident for most part of the second half, thus, maintaining our full-year inflation forecast of 4.7%. Rising inflation expectations and the central bank’s hawkish monetary policy stance have bolstered our view for a third 25bps policy rate hike, which we expect to be initiated in the upcoming BSP Monetary Board meeting scheduled on 9 August.

The 0.6 percentage point (pp) jump in year-on-year (yoy) headline inflation between May and June stems from sharper price increases in six out of eleven commodity groups, which include alcoholic beverages and tobacco, education, housing and utilities, and transport. During the first half of the year, headline inflation averaged 4.3%. Similarly, core CPI inflation accelerated to 4.3% yoy in June from 3.6% in May. On a month-on-month (mom) basis, CPI inflation surged to 0.6% in June from 0.0% in May.

We believe the inflation drivers in June were still food supply disruptions, peso depreciation, new excise taxes, and elevated oil prices, plus the start of the school season that resulted in higher educational costs. But we now see additional factors that would exert more inflationary pressures such as minimum wage hikes and transport fare increases. These trends affirm our view that inflation expectations will continue to increase throughout the year, thus, maintaining our full-year forecast of 4.7%.

With rising inflation and inflation expectations, we observed the country’s real interest rate—which is the difference between the nominal interest rate (policy rate) and inflation (inflation expectations)—is becoming more negative, unlike most East Asian economies that have positive real interest rates. Given that the domestic economy is exhibiting robust growth, and is near its potential, thus raising overheating risks, then we posit that there is a need to normalize the policy rate in order to catch up with inflation. Otherwise, there could be further depreciation and volatility in the local currency as local interest-bearing assets are becoming less attractive in the region. We think BSP’s hawkish tone as per its May monetary policy statement alongside BSP Governor Nestor Espenilla, Jr.’s reaction to the June inflation figures that “this will shape the strength and timing of [the] next monetary policy response to firmly anchor inflation expectations” have bolstered our view for another 25bps policy rate hike to be made in the third quarter, i.e., in the next BSP Monetary Board’s meeting scheduled on 9 August.

Figure: Headline Inflation & Inflation Target

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