Philippines: Inflation loses further traction in July – UOB

The Philippines’ headline inflation decelerated further to below 5.0% for the first time in 15 months, settling at 4.7% y/y in Jul (from +5.4% in Jun). The outturn came in better than Bloomberg consensus (4.9%) but a tad higher than our estimate (4.6%). It also marked the lowest reading since Mar 2022, thanks to the slowdown in prices of most consumer price index (CPI) components particularly food & non-alcoholic beverages, transport, and housing, utilities & other fuels amid favourable base effects. 

Although inflation appears to sustain its downtrend in 2H23, risks to the overall outlook remain tilted to the upside. Recent restrictive trade policies introduced by neighbouring countries on selected food commodities, the event of typhoons Egay and Falcon striking the country, as well as an extended oil output and export cut by major oil producers have presented new upside risks to the nearterm inflation outlook. This is in addition to the existing concerns about potential changes in domestic price policies amid ongoing supply constraints of key food items and currency fluctuation. Hence, in the absence of further supply shock, we keep to our view that inflation will gradually return to the BSP’s 2.0%-4.0% target range only in 4Q23, leading to a full-year inflation rate of 5.3% for 2023 (BSP est: 5.4%, 2022: 5.8%) and 2.5% for 2024 (BSP est: 2.9%). 

We reiterate our view of an extended interest rate pause by BSP until year-end since the inflation trajectory remains moving in line with our assessment with persistent positive real interest rates and signs of slowing economic activities in recent months. Having said that, the biggest concern for now is the narrowing interest-rate differential with US rates below 100bps, whether it would prompt the BSP to resume its rate hike at the upcoming Monetary Board (MB) meeting on 17 Aug as a pre-emptive move against imported inflation pressures arising from currency volatility and trade policy changes in neighbouring countries.