By Francis Allan L. Angelo
The Bangko Sentral ng Pilipinas (BSP) decided to maintain its key interest rates during the Monetary Board meeting held on June 27, 2024.
The overnight reverse repurchase (RRP) rate remains at 6.50 percent, while the interest rates on the overnight deposit and lending facilities are held at 6.00 percent and 7.00 percent, respectively.
The decision to keep rates steady comes as the balance of risks to the inflation outlook has shifted towards the downside, influenced by the impact of the tariff adjustment on rice prices under Executive Order No. 62.
Despite this, lingering pressures on domestic prices of other food items, transport charges, and electricity rates pose potential upside risks to inflation.
Headline inflation slightly increased to 3.9 percent year-on-year in May from 3.8 percent in April, primarily due to higher non-food inflation driven by increased electricity rates and transport costs.
However, food inflation eased, although rice inflation remained elevated. Core inflation continued to decelerate in May.
The BSP’s latest survey of private sector forecasters indicates that inflation expectations are well-anchored for 2024 to 2026.
The mean inflation forecast for 2024 remains at 3.7 percent, while forecasts for 2025 and 2026 have declined to 3.4 percent and 3.3 percent, respectively.
Analysts expect within-target inflation over the policy horizon, although upside risks from supply-side pressures and potential second-round effects remain.
The BSP projects that inflation will settle above the target range in July due to positive base effects but is expected to return within the target range beginning in August.
Price pressures from rice are anticipated to ease following the implementation of the rice tariff reduction and improved rice production with the end of the El Niño phenomenon.
Prospects for domestic output growth remain robust over the medium term, supported by improved labor market conditions and strong export growth.
However, GDP growth is expected to decelerate in the second half of 2024 partly due to the impact of positive real interest rates following the BSP’s tightening cycle.
Globally, economic activity has broadly improved, with the JP Morgan All-Industry Output Index increasing in May.
Economic activity rose in nearly all covered countries, led by India, followed by the US, Eurozone, China, and Japan.
ASEAN manufacturing activity also expanded at a faster rate in May, driven by solid domestic demand.
On the financial front, the peso depreciated by 1.49 percent to an average of P58.19/US$1 between May 16 and June 5, 2024.
The weakening was due to expectations that the US Federal Reserve will maintain higher interest rates for a longer period amid slow disinflation progress.
National government spending rose by 16.2 percent year-on-year from January to April 2024, with revenues increasing by 16.8 percent. The fiscal deficit widened to P229.9 billion from P204.1 billion in the same period the previous year.
In the agricultural sector, nationwide average retail rice prices decreased in May as domestic supply increased during the summer harvest season.
The signing of EO 62 on June 20, 2024, which led to lower rice tariffs, contributed to the downward revision in inflation forecasts for 2024-2025.
Oil prices have also decreased due to potential production adjustments by OPEC+ members and ongoing ceasefire negotiations between Israel and Hamas.
Electricity rates saw a decline as well, with Meralco implementing a staggered collection of generation costs.
Overall, the Monetary Board deems it appropriate to hold the current monetary policy settings steady.
Price pressures are expected to dissipate in the near term, and if sustained, this improvement in the inflation outlook could allow for a less restrictive monetary policy stance in the future.
However, uncertainty in the external environment necessitates continued caution against potential financial market spillovers.
