Cooling Philippine Inflation Boosts Odds of Rate Pause

Philippines’ overall inflation cooled for a third straight month in April from a year ago and was below all analysts estimates, supporting the case for a pause in monetary policy tightening.

(Bloomberg) — Philippines’ overall inflation cooled for a third straight month in April from a year ago and was below all analysts estimates, supporting the case for a pause in monetary policy tightening.

Consumer prices rose 6.6% year-on-year last month from 7.6% in March to the slowest pace since August. The print was lower than all 24 estimates in a Bloomberg survey where the median was for a 7% gain. While still way above the central bank’s 2%-4% full-year inflation target, it well within Bangko Sentral ng Pilipinas’s expectation for the monthly reading to be between 6.3% and 7.1%.

Compared to March, the price index last month declined by 0.2%, matching the month-on-month contraction in March. Core inflation, which strips out volatile food and fuel costs, eased slightly to 7.9% from 8% in March — still holding near a 24-year high.

The BSP, which has raised borrowing costs by 425 basis points since last year, said Friday that it would consider the inflation reading along with the latest pulse check of the economy next week to decide on its monetary policy settings. Although Governor Felipe Medalla last month hinted at weighing a pause if inflation slows, a halt is not a given, especially with peers in Australia and Malaysia surprising markets this week by resuming hikes.

Philippine inflation is still seen elevated in the near term and the risks to the outlook for this year and next remains “tilted heavily towards the upside,” the BSP said in a statement Friday after the data. Authorities “remain committed to adjusting the monetary policy stance as necessary to prevent the further broadening of price pressures as well as the emergence of additional second order effects.”

In March, Medalla said he needs to see “enough low month-on-month inflation, to give the public confidence” that the BSP 2024 average forecast of 2.9% is likely. Finance Secretary Benjamin Diokno, a member of the monetary board and an advocate for a pause, said Friday he expects inflation to ease to the 2%-4% target band by the fourth quarter, if not sooner.

What Bloomberg Economics Says…

April’s sharp deceleration in Philippine headline inflation and peaking core inflation are further significant steps in the direction of a rate pause. Whether this is enough progress to warrant a hold in Bangko Sentral ng Pilipinas’ tightening cycle this month depends how far forward-looking the central bank will be. 

—Tamara Mast Henderson, Asean economist

For the full note, click here

The peso fell as much as 0.1% against the dollar after the data, before trading slightly up at 10:33 a.m. local time.

“Any pause on policy-rate hikes could weigh on the peso due to narrower interest-rate differentials,” said Michael Ricafort, chief economist at Rizal Commercial Banking Corp. in Manila. “We expect BSP to hold rates this month, though any peso volatility would boost the odds for a hike.”

The Federal Reserve’s decision on Wednesday to raise its benchmark rate by a quarter percentage point while hinting at pausing its tightening cycle could also weigh on BSP’s next policy action on May 18.

–With assistance from Manolo Serapio Jr., Cecilia Yap and Karl Lester M. Yap.

(Updates with more details from third paragraph.)

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