The Bangko Sentral ng Pilipinas (BSP) may extend its monetary policy tightening cycle due to the widening pass-through effects of energy shocks from the Middle East war, which are expected to keep core inflation elevated. Analysts believe that the BSP will continue to take a hawkish stance to address the rising core inflation.
Core inflation, which excludes volatile food and fuel prices, accelerated to 4.4% in June, its fastest pace in nearly three years. This increase is attributed to the broadening of price increases across the consumer price index (CPI) basket, as firms pass on costs to consumers. The BSP's measured policy stance is expected to continue, with a possible 25-basis-point hike at its next policy review in August.
Analysts expect core inflation to remain sticky throughout the year due to recent price hikes in restaurants, healthcare, personal care, and education. The upcoming minimum wage hike in the National Capital Region (NCR) and higher aggregate demand from government infrastructure spending are also seen as contributing factors. The first tranche of the P85 daily minimum wage hike in NCR will be implemented on July 25, which may further fuel inflation.
The BSP's tightening cycle may be influenced by the risks of El Niño, which could lead to a fresh round of supply shocks and higher commodity prices. A "super El Niño" event may result in a 20-30% decline in agricultural output, potentially exacerbating inflationary pressures. The central bank is expected to closely monitor these developments and adjust its monetary policy stance accordingly.
Analysts predict that the BSP will deliver a final 25-basis-point hike in August to cap its tightening cycle this year. However, there is a possibility of more hikes if price pressures worsen due to the Middle East war, El Niño, or higher minimum wage and transport fare hikes. The BSP's goal is to bring inflation back to its 3% target through monetary policy rate adjustments.
The Philippine economy is vulnerable to the impact of El Niño, given its position as a net food importer and the significant weight of food in its CPI basket. Rice, in particular, accounts for 8.9% of the CPI basket, making the country susceptible to higher rice prices. Nomura Global Markets Research has slashed its Philippine inflation forecast, but still expects heated core inflation to warrant additional rate hikes.
The Monetary Board is scheduled to hold three more regular policy reviews this year, and analysts expect the BSP to remain vigilant in its efforts to maintain price stability. The central bank's actions will be crucial in determining the country's economic growth prospects and inflation outlook.
