Philippines inflation 4.4% up in July, casting doubt on rate cut

The Philippines’ inflation rate unexpectedly climbed to 4.4 per cent in July, the Philippine Statistics Authority (PSA) data showed on Tuesday, surpassing the central bank’s target and dampening expectations of an imminent interest rate cut. This marks the first time this year that inflation has breached the government’s target range.

The uptick in prices is primarily attributed to rising costs for non-food items. Higher electricity rates and the upward adjustment of domestic fuel prices were key contributors. Additionally, the start of the school year pushed up education costs., housing, and transportation.

While the overall inflation rate remains below the peak seen last year, the latest data will prompt the Bangko Sentral ng Pilipinas (BSP) to adopt a more cautious stance on monetary policy.

BSP said the inflation rate “will likely follow a general downtrend” starting this month. “The balance of risks to the inflation outlook has shifted to the downside for 2024 and 2025 due largely to the impact of the lower import tariff on rice,” BSP statement read.

BSP Governor Eli Remolona hinted at a reduced likelihood of a rate cut at the central bank’s next meeting on August 15 after July inflation breached target and hit a nine-month high. However, he also acknowledged that a rate reduction remains a possibility, contingent upon economic data and inflation trends.

The central bank is a “little bit less likely” to lower its benchmark rate at its August 15 policy meeting after the July inflation print came in “slightly worse than expected,” Remolona told reporters during an event in Manila. The BSP had estimated inflation last month to come in between 4 per cent and 4.8 per cent on higher power and food costs.

The policymakers will consider a rate cut if second-quarter economic growth data— due out on August 8 — would be “unexpectedly weak” and if inflation and inflation expectations show a downward path, Remolona added.

The central bank governor had telegraphed the potential of cutting borrowing costs from a 17-year-high this month as early as May, citing easing price risks. Last week, Remolona said inflation may have already peaked in July. This makes an August rate cut “still a possibility.”

Asked whether a rate reduction this month is still on track, Remolona said “somewhat,” asserting that the central bank is open to an off-cycle move if an August cut doesn’t happen. The US Federal Reserve is likely to cut rates in September, he noted.

Attribution: Bloomberg, The Philippine Statistics Authority (PSA), Bangko Sentral ng Pilipinas (BSP)