BSP: Aug. rate cut now ‘little less likely’ after inflation target breach

Eli Remolona | PHOTO FROM BSP.GOV.PH

Bangko Sentral ng Pilipinas (BSP) Governor Eli Remolona Jr. on Tuesday said a rate cut this month is now “little less likely” after inflation in July turned out “slightly worse than expected”, although he did not rule out the possibility of an off-cycle easing.

Asked about the chances of a rate cut happening at the Aug. 15 meeting of the Monetary Board, Remolona told reporters that the possibility of an easing is now “a little bit less likely because inflation is elevated.”

Data released yesterday showed inflation quickened to 4.4 percent in July, faster than 3.7 percent recorded in June and the highest in nine months.

While the latest reading fell within the 4 to 4.8 percent forecast range of the BSP for July, it marked the first time this year that inflation overshot the central bank’s 2 to 4 percent target band.

While he had already anticipated a breach of the inflation target because of base effects, Remolona said the July price growth and the impact of data distortions were “slightly worse than expected”.

“Without the base effect, [July inflation is] really 4.1 percent, which is still worse than expected but not that bad because the ceiling was slightly breached,” the BSP chief said.

Off-cycle

A possible deferment of a rate cut this month would come while other central banks, including the US Federal Reserve, are giving clearer hints of easing. Last week, Fed Chair Jerome Powell said a rate reduction could be on the table in September if inflation stateside shows a sustained decline.

Prior to the release of the above-target July inflation figure, Remolona had said a rate cut in August is possible amid fewer price risks following the reduction of tariffs on rice, a staple food for Filipinos. In a statement, the BSP said price gains “will likely follow a general downtrend beginning in August 2024.”

But if an August easing doesn’t happen, Remolona said the BSP is “always open” to an off-cycle rate cut. For now, the BSP chief said monetary authorities would alsowait for other data points, including the second quarter gross domestic product (GDP) data to be released on Aug. 8.

“If growth is unexpectedly weak and it looks like our projections of inflation and inflation expectations suggest lower inflation going forward, we can cut,” he said.

Delayed cut?

For Miguel Chanco, economist at Pantheon Macroeconomics, said the inflation flare-up last month “means that an August rate cut is now off the table” and the policy rate would stay at an over 17-year high of 6.5 percent for the time being.

“Accordingly, our revised base case for the BSP is a 25-basis point cut in October, followed by a 50-bp in December. To be sure, if we’re right about a likely huge miss in Thursday’s second GDP report, then an August cut could come swiftly back into the discussion,” Chanco said.

Separately, Ruben Carlo Asuncion, chief economist at Union Bank of the Philippines, said an off-cycle rate reduction should not be a problem for the BSP.

“They’ve done it before, and no reputation was apparently ruined. So, I think, it wouldn’t hurt as long as the move will accomplish the goal they have set,” Asuncion said.