Philippine inflation eases further in May, central bank signals easing

Philippine annual inflation slowed to 1.3% in May, the lowest since November 2019, driven by lower utility and food price increases, prompting the central bank to signal a potential shift towards a more accommodative monetary policy. The central bank, which already cut its key policy rate by 25 bps in April, is scheduled to review policy again on June 19, with economists anticipating further rate cuts. A newly approved minimum wage increase, however, could exert upward pressure on inflation.

Analysis

Philippine annual inflation decelerated for the fourth consecutive month to 1.3% year-on-year in May, its lowest level since November 2019, primarily driven by moderated increases in utility and food prices. This figure, which matched Reuters poll forecasts, brought the year-to-date average inflation to 1.9%, falling below the Bangko Sentral ng Pilipinas' (BSP) target range of 2.0% to 4.0%. Specifically, price increases for housing, water, electricity, and other fuels eased to 2.3% in May from 2.9% in April, while transport costs experienced a more significant decline of 2.4%, compared to a 2.1% drop in the prior month. Core inflation, which excludes volatile food and energy components, remained stable at 2.2%. In response to these developments, the BSP stated that the manageable inflation outlook and downside risks to domestic economic activity allow for a shift toward a more accommodative monetary policy stance, reinforcing expectations for further interest rate reductions following the 25 basis point cut to 5.5% in April. Economists, such as Metrobank's Nicholas Mapa, anticipate another rate cut at the BSP's upcoming policy review on June 19. However, a newly congressional-approved bill to increase the daily minimum wage by 200 pesos ($3.60) presents a potential upside risk to future inflation, as noted by the country’s chief statistician.

Key Decisions for Investors

• Investors should anticipate further monetary easing by the Bangko Sentral ng Pilipinas in its June meeting, which could positively impact Philippine fixed-income assets and potentially create a more supportive environment for domestic equities sensitive to interest rate changes.
• Monitor the implementation and macroeconomic pass-through of the approved minimum wage hike, as this fiscal measure could introduce future inflationary pressures, potentially influencing the BSP's policy trajectory beyond the immediate term.
• Consider the implications of a continued dovish monetary policy stance on the Philippine peso, as further rate cuts could narrow interest rate differentials and potentially exert depreciation pressure on the currency.