The country’s annual headline inflation rate recorded its highest level in two-and-a-half years as it settled at 4.5 percent in May, providing a signal for the central bank to tighten its key policy rates in its upcoming June 19 meeting.
Data from the Philippine Statistics Authority (PSA) showed that the inflation rate for the month rose from April’s 4.1 percent, and was primarily driven by increases in the prices of food, electricity, and petroleum.
The May inflation rate was also significantly higher than the 2.6 percent recorded in the same period last year, and was the highest since November 2011, when the rate stood at 4.7 percent.
Despite the uptick, the May inflation rate was still within the upper limit of the 3-percent to 5-percent full-year target of the government for 2014. The rate also stayed within the 3.9 percent to 4.7 percent forecast range by the Bangko Sentral ng Pilipinas (BSP).
The figure also confirms central bank pronouncements that while inflation over the policy horizon remains manageable, the room to manage its interest rates has “narrowed,” BSP Governor Amando Tetangco Jr. said on Thursday.
Tetangco said in a text message to reporters the central bank will carefully monitor if there are second-round effects being triggered by the increases in prices of food and other commodities.
“Also we will monitor the actions of the advanced central banks and check the impact of such on global investor sentiments,” he said.
The BSP governor said the central bank will not hesitate to adjust its policy settings should the inflation target be at risk.
Meanwhile, in a commentary, the Bank of the Philippine Islands (BPI) foresees that the central bank will refrain from another hike in the reserve requirement ratio of banks but may tighten interest rates for reverse repurchases (RRP) as well as the special deposit accounts (SDA) to defend its inflation target for this year and for 2015.
“The 4.5 percent year-on-year inflation print will tilt the inflation path towards a higher trajectory for 2015 and further threatens the BSP’s inflation target of 2 percent to 4 percent in the coming year,” it stated.
BPI said that the central bank has refrained from reacting to one-off, price-induced inflation changes, but the specter of second-round effects may be enough to prompt firmer action from the monetary authority.
Higher inflation print also increases the likelihood that the BSP would need to enact a pre-emptive policy action to successfully defend its 2015 inflation target, it added.
“The BSP may refrain from further hiking its reserve requirement after two consecutive adjustments with the next move possibly in the realm of interest rates with the BSP adjusting both the SDA and the RRP to clearly signal that the central bank is in a tightening cycle,” it stated.
BPI said that a rate hike on the BSP-Monetary Board June 19 meeting may no longer be avoidable, adding that both RRP and SDA rates could be hiked by 25 basis point each.
On the other hand, despite the higher inflation turnout in May, the National Economic and Development Authority (NEDA) expects the country’s headline inflation rate for full year 2014 to fall within the government’s target, barring major economic shocks.
“However, the balance of risks to the inflation outlook remains slightly tilted toward the upside,” said Economic Planning Secretary Arsenio Balisacan.
“Potential increases in food prices may emanate from weather disturbances such as the possibility of an imminent El Niño, the depreciating peso, and the pending petitions for further adjustments in utility rates, transport fares, and wages,” he added.
Balisacan, who is also the NEDA director general, said that the upside risks to inflation especially in food prices, need to be addressed by interventions which can focus on ensuring supply sufficiency by improving the level of inventories and the efficiency of distribution systems.
He underscored that the government should intensify efforts to implement programs that will help provinces and cities which are moderately to highly vulnerable to the adverse impact of a prolonged dry spell.
“We should provide further support to precautionary steps that are already being undertaken by the Department of Agriculture to avert any adverse impacts of the incoming El Niño,” said Balisacan.
These steps include cloud seeding operations to induce rains in major watersheds and farming areas, distribution of shallow tube wells and drought-tolerant crop varieties, and provision of assistance to farmers who prefer crop shifting to drought-resistant crops.
“But equally important is ensuring that the measures undertaken by the government to help maintain a manageable rate of inflation will remain supportive of economic growth,” he concluded.