Bangko Sentral sees risks of above-target April inflation

Regulator cites expensive meat, rice, as well as weak peso

Inflation may have breached the government’s target range in April due to expensive meat and rice and after a weak peso pushed up local pump prices, the Bangko Sentral ng Pilipinas (BSP) said on Tuesday.

The BSP said it projected inflation in April to have settled between 3.5 and 4.3 percent. If the upper-end of the forecast range is realized, price growth last month would be faster than the 3.7 percent recorded in March.

At the same time, inflation would overshoot the BSP’s 2 to 4 percent target band after staying within that range for four straight months. The inflation report for April is set to be released on May 7. The BSP said rice price gains likely remained a major contributor to inflation last month, with other key commodities also expected to have registered faster cost increases.

”Continued price increases for rice and meat along with higher gasoline prices and the peso depreciation are the primary sources of upward price pressures for the month,” the central bank said.

“Meanwhile, lower prices of fish, fruits, vegetables as well as lower electricity rates and the rollback in LPG prices could offset the upside price pressures,” it added.

Delayed cuts

An above-target inflation would likely prompt the BSP to delay any rate cuts to avoid upsetting inflation expectations. At present, the BSP’s policy rate, which banks use as a guide when charging interest on loans, has been kept at 6.5 percent, the highest in nearly 17 years.

Governor Eli Remolona Jr. already floated the possibility of a rate cut in the first quarter of 2025—much later than previous expectations of monetary policy loosening happening in the second half of 2024.

“Going forward, the BSP will continue to monitor developments affecting the outlook for inflation and growth in line with its data-dependent approach to monetary policy decision-making,” the central bank said.

A weak peso that has fallen to 17-month lows is also preventing the BSP from pulling the trigger for easing, with geopolitical risks and diverging outlook on rate cuts by the US Federal Reserve powering up the greenback. This is because a volatile peso could push up import costs and stoke inflation.

Local developments

Instead of staying in lockstep with the Fed, Krishna Srinivasan, director for the Asia Pacific department of the International Monetary Fund, said the BSP and other Asian central banks are now in a better position to focus more on domestic developments when deciding the right policy moves.

“Central banks should try to focus on domestic demand conditions and its implication for inflation. I would also argue that, fortunately, Asian central banks are in a stronger version today to focus on domestic conditions than say even 10 years ago,” Srinivasan said in a webinar on Tuesday.

“In many ways, central banks are in a better position to focus their attention on domestic conditions and so that is where the emphasis, I would say, should be placed,” he added.