Philippine Inflation Surges, Central Bank Considers Rate Cut Amid Economic Uncertainty

Governor Eli Remolona of the Philippine Central Bank has signaled a reduced likelihood of a rate cut next week after July inflation exceeded targets, reaching a nine-month high. Consumer prices rose by 4.4% year-over-year due to increased utility costs, surpassing the central bank's goal.

Philippine Inflation Hits Nine-Month High, Central Bank Governor Signals Lower Likelihood of Rate Cut

After July, inflation exceeded the target and reached a nine-month high. Governor Eli Remolona of the Philippine Central Bank suggested that the probability of a rate reduction next week would decrease.

The statistics agency reported on August 6 that consumer prices increased by 4.4% year over year in the previous month due to increased utility costs. This surpassed the Bangko Sentral ng Pilipinas' objective for the first time this year and exceeded economists' 4.1% median forecast in a Bloomberg News survey.

At an event in Manila, Remolona informed reporters that the BSP is "slightly less likely" to lower its benchmark rate at its August 15 policy meeting following the July inflation print, which was "slightly worse than anticipated." Last month, the central bank projected that inflation would be between 4% and 4.8% due to the increased cost of power and food.

He stated that policymakers would contemplate a rate reduction if the second-quarter economic growth report, scheduled for release on August 8, is "unexpectedly weak" and if inflation and inflation expectations indicate a downward trajectory.

As early as May, the central bank chief had hinted at possibly reducing borrowing costs from a 17-year high this month, citing the reduction in price risks. He stated last week that inflation may have already reached its zenith in July, making an August rate cut "still a possibility."

When asked whether a rate reduction this month is still on track, Remolona responded, "Somewhat." He also stated that the BSP is amenable to an off-cycle move if an August cut does not occur and that the Federal Reserve will probably reduce rates in September.

Global Market Selloff Influences Rate Cut Decisions as Philippine Peso Trades Below 58 Against Dollar

The global market selloff, which has fueled speculation that the Federal Reserve will soon transition to easing, has provided policymakers worldwide with additional flexibility to implement rate cuts. For the second day in a row, the peso trades below 58 against the dollar.

On August 6, the central bank stated that inflation is expected to "follow a general downtrend" beginning this month. The BSP noted that the balance of risks to the inflation outlook has shifted to the downside for 2024 and 2025, primarily due to the import tariff on rice.

In addition to inflation, the Monetary Board will evaluate the price outlook and balance of risks by considering the most recent economic growth data. A separate Bloomberg survey indicates that gross domestic product growth likely increased to 6.3% in the second quarter.

According to Bloomberg Economics, the peso's resilience to market turbulence must also be evaluated. The August rate decision will also be contingent upon the publication of 2Q GDP figures later this week. The BSP meeting scheduled for next week is a razor-thin margin between a 25-bp rate cut and a hold.