June inflation seen within 2-4 percent target

June inflation seen within 2-4 percent target

Most forecasts point to 3.9 percent print

MANILA, Philippines — Headline inflation may still fall within the two to four percent target of the Bangko Sentral ng Pilipinas (BSP) in June amid easing price pressures, analysts said.

Sarah Tan, an economist at Moody’s Analytics, said inflation is expected to remain unchanged at 3.9 percent in June, ending four straight months of increases.

At 3.9 percent, the projection is well within the 3.4 to 4.2 percent forecast range of the BSP. The Philippine Statistics Authority will release the June consumer price index (CPI) report on July 5.

“Soaring prices of rice over the last few months have broadly stabilized, as we’ve passed the peak of the dry spell period. Further, electricity rates in June were lowered by Manila Electric Co. (Meralco) – the largest utility provider in the country,” Tan said.

Meralco lowered the electricity rate by P1.9623 per kilowatt-hour in June, bringing the overall rate for a typical household to P9.4516 per kWh from the previous month’s P11.4139 per kWh.

This was after an order from the Energy Regulatory Commission to stagger the collection of generation charges from the Wholesale Electricity Spot Market.

However, Tan said upward price pressures last month may likely come from other agricultural products besides rice. Transport charges may also remain elevated.

UnionBank chief economist Ruben Carlo Asuncion likewise said June inflation may hit 3.9 percent, as dissipating supply shocks may cause food inflation to end the year in the 2.4 to three percent range, significantly lower than the eight percent average in 2023.

However, non-food inflation could bring upside surprises. This includes the index for housing and utilities, which may grow by 1.7 percent in June before rising further to above three percent in August to September.

The index for restaurants and miscellaneous goods and services is also projected to hit 5.7 to 5.8 percent toward yearend, from 5.3 percent in May.

“We expect the non-CPI components to start registering upticks that may mirror not just base effects fading but the second round pass-through effects in the second half that could deter headline inflation from breaching the downside of three percent,” Asuncion said.

Miguel Chanco, chief emerging Asia economist at Pantheon Macroeconomics, also forecasts June inflation at 3.9 percent.

“In terms of the big picture, the June print should mark the peak for the year, with disinflation set to take hold from July, especially as food-price base effects turn significantly favorable. This, in our view, will open the door for the BSP to enact its first rate cut in August,” he said.

Last week, the BSP’s Monetary Board kept the key interest rate at a 17-year high of 6.5 percent for the sixth straight meeting. This was after the central bank hiked rates by 450 basis points from May 2022 to October 2023.

BSP Governor Eli Remolona Jr. earlier said risks to the inflation outlook have shifted to the downside, which could give the Monetary Board room to cut rates by 25 basis points in the third quarter.

Bank of the Philippine Islands lead economist Jun Neri said headline inflation may inch down to 3.8 percent in June from 3.9 percent in May.

“If (inflation)print for both June and July stays close or below four percent, we think the chances of a Monetary Board rate cut in August will be pretty high, whether the US Federal Reserve cuts rates in July or not,” he said.

For her part, Moody‘s Tan said the BSP would wait for headline inflation to fade before making any moves.

“We expect inflation to moderate in the third quarter, which will allow the BSP to start planning for its monetary policy easing,” she said. “Should the inflation print for June match or ease from May, this will give the BSP confidence to begin its policy easing cycle sooner rather than later.”

Meanwhile, UnionBank’s Asuncion said the weaker peso and upticks in oil prices could delay the BSP’s first rate cut to the fourth quarter instead, in lockstep with the US Fed.

“The BSP may want to keep interest rates high for now to mitigate the risk of a build-up of cost pressures from this tandem of weak peso and high oil prices, that can conspire to reignite faster second round price effects later in the year,” he said.

However, the BSP should not wait for the US Fed if it delays its rate cuts to early next year, since elevated borrowing costs may severely restrain production and investment activities, he added.