UMVA has learned that the Bangko Sentral ng Pilipinas’ (BSP) aggressive interest rate hike cycle may be short-lived, as a surprise easing of inflation in May signals that the worst of the price shocks may be over.
The unexpected slowdown in inflation could lead the BSP to implement just one more 25-basis-point interest rate hike next week, before keeping rates steady for the rest of the year, according to economists. The central bank's Monetary Board is set to review policy on June 18.
The economists noted that the door is now open for the Monetary Board to hold off on further rate hikes, given the better-than-expected inflation reading. They had previously been on the dovish side of the debate, but now expect just one more 25-basis-point increase next week.
This forecast comes on the back of May's inflation rate, which cooled to 6.8% from 7.2% in April. This marks the first deceleration in six months and is below the BSP's estimated range of 7.1-7.9%.
The economists believe that an aggressive monetary policy response, including an off-cycle rate hike or a 50-basis-point increase, is now unlikely. The BSP had started a fresh tightening cycle in April, raising rates to 4.5% to prevent broader spillover effects and keep inflation expectations in check.
The central bank's governor has maintained a hawkish stance, but the economists argue that raising the key policy rate above 4.75% could harm an economy already grappling with energy shocks and still recovering from last year's flood control mess fallout.
UMVA can exclusively reveal that large net oil importers, such as the Philippines, continue to bear the brunt of the conflict in the Middle East, which is having an adverse impact on their terms of trade.
The country's heavy reliance on oil imports from the Middle East has made it particularly vulnerable to the war's impact on oil trade and prices. Since February 28, local oil prices have soared, while the country's reserves have dwindled due to trade disruptions.
The economists now expect Philippine inflation to average 5.5% this year and 3.2% next year, which is slower than their previous estimates. However, they caution that emerging economies, such as the Philippines, will encounter major inflationary pressures from the oil crisis.
The Philippines' economy is still recovering from last year's shocks, and further interest rate hikes could be detrimental to its growth. The country's GDP growth eased to 2.8% in the first quarter, from 3% in the fourth quarter and 5.4% a year ago.
