Rate cut still on the table even with an above-target July inflation

There’s still a chance that inflation would breach the Bangko Sentral ng Pilipinas’ (BSP) 2-percent to 4-percent target range in July, although such a flare-up would unlikely shake expectations of a rate cut in August, according to Governor Eli Remolona Jr.

The BSP chief said a July breach of the inflation target was already taken into account when he gave clearer signals of a rate cut by August after the Monetary Board convened last June 27, which saw the key rate staying at an over 17-year high for the sixth policy meeting.

But the BSP chief said the chances of inflation overshooting the target band this month was still “50-50,” adding that such a spike would likely be due to distortions from base effects.

“So it’s not yet time to declare victory, as people say,” Remolona told reporters on the sidelines of the 51st anniversary celebration of the Development Academy of the Philippines last week.

“So we do expect it (inflation) to breach in July. So if it doesn’t breach, then it’s better than expected,” he added.

Data released last week showed inflation eased to 3.7 percent in June from 3.9 percent in May, snapping four straight months of ascent mainly due to lower costs of electricity and transportation.

But state statisticians said the deceleration in rice inflation last month was still “insubstantial,” although the government’s move to further slash the tariff rate on the staple grain is expected to bring down prices of the commodity in the coming months.

That reduction in import duty on rice was also one of the reasons why the BSP now sees fewer risks to its inflation outlook. And for that reason, Remolona last month said it was “somewhat more likely” that the BSP would cut the policy rate by a total of 50 basis points (bps) this year—with the first 25-bp cut possibly in August and ahead of the US Federal Reserve.

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While the softer inflation in June was a “cause for reassurance,” Remolona said the BSP still needed to see “a few more numbers” to build a stronger case for an easing in August.

He also ruled out the possibility of a larger 75-bp total cuts this year, saying such an action would be too aggressive. But a strong second quarter economic growth would give the BSP “cushion” when it is time to ease, he added.

“The number for July will be released before our meeting. Then, of course, there are all the other numbers,” Remolona said.