Philippines: Inflation grinded lower in June – UOB

The Philippines’ headline inflation continued on a downward trend, decelerating for a fifth straight month to 5.4% y/y in Jun (May: +6.1%). It also marked the lowest reading since May 2022 and came in lower than our estimate (5.7%) and Bloomberg consensus (5.5%). There was a broad-based moderation across CPI components, led by transport, food & non-alcoholic beverages, and housing, utilities & other fuels amid the dissipating of year-ago high base effects.   

Given that inflation downtrend remains in line with our expectation, we maintain our full-year inflation forecasts at 5.3% for 2023 (BSP est: 5.4%, 2022: 5.8%) and 2.5% for 2024 (BSP est: 2.9%). Our baseline projections have not factored in any potential changes in domestic policy and unexpected circumstances particularly from weather, with inflation gradually returning to BSP’s 2.0%-4.0% target range by 4Q23. Meanwhile, upside risks could emanate from persistent supply constraints of key food items, upward adjustments in public transport fares and wages, possible knock-on effects of higher toll rates on agricultural prices, adverse weather, currency fluctuation, and volatile global commodity prices.

The latest batch of inflation readings and stable currency support our view for an extended interest rate pause by BSP until year-end. Real interest rates have turned positive for the second consecutive month and core inflation eased for a third straight month, further reflecting the lagged effects of past rate hikes. While exercising caution in its response to the Fed’s latest hawkish remarks, BSP will likely prioritize on domestic growth momentum and inflation expectations against a narrowing interest-rate differential with US rates at this juncture. The Monetary Board will next meet on 17 Aug.