Rising Inflation in the Philippines Dims Outlook for Interest Rate Cut

The recently released inflation data in the Philippines complicates the chances of an interest rate cut by the central bank in the near future. Consumer prices rose by 4.4 percent in July compared to the previous year, surpassing the economists' forecasts and marking a nine-month high. Eli Remolona, the head of the Philippine central bank, stated that the likelihood of a rate cut at the next monetary policy meeting on August 15 has diminished. The bank had originally expected an inflation rate between 4 and 4.8 percent, primarily driven by higher energy and food costs. Remolona indicated that a rate cut would be considered if economic growth in the second quarter turned out unexpectedly weak and both the current inflation rate and market expectations were on a downward path. He had already hinted at a possible reduction in borrowing costs in May and reinforced this outlook last week, predicting that inflation had peaked in July. When asked whether a rate cut was still possible this month, Remolona cautiously replied "somewhat," explaining that an extraordinary decision could also be made if a cut does not occur in August. It is expected that the Federal Reserve will lower its key interest rate in September, which could influence global market expectations. A separate central bank report forecasts a general decline in inflation in the coming months, particularly anticipating a lower-risk inflation environment for 2024 and 2025 due to reduced import tariffs on rice. The latest economic growth data and the inflation situation will be used to assess price developments and the balance of risks. A growth in gross domestic product of 6.3 percent in the second quarter was projected in another survey. Economic observers note that the decision on interest rate policy in August heavily depends on the GDP data for the second quarter and the resilience of the peso against current market turbulences. Overall, it is expected that the upcoming meeting of the Bangko Sentral ng Pilipinas (BSP) will result in a tight decision between holding rates steady and a 25 basis points cut. Furthermore, the statistics agency recorded a decline in rice price inflation from 22.5 percent in June to 20.9 percent in July, with a further easing anticipated this month. Another report indicated that exports fell more sharply than expected in June, though the trade balance improved.