Inflation may have slowed in August

Inflation may have resumed its downward trend in August due to lower oil prices, a stronger peso and cheaper rice, meat and fish, according to the latest forecast by the Bangko Sentral ng Pilipinas (BSP). If this forecast comes true, it will vindicate its decision to cut interest rates earlier than expected.

The Bangko Sentral ng Pilipinas said in a statement on Friday that it expects inflation to stabilize between 3.2% and 4% last month, down from 4.4% in July.

read: Inflation rises to 4.4% in July – PSA

The central bank’s forecast sees inflation likely to fall back to its 2% to 4% target range in August after a spike in July. The Philippine Statistics Authority (PSA) will release official inflation data for August on September 5.

“Higher electricity prices and agricultural product prices due to adverse weather conditions were the main sources of price increases this month,” the BSP said.

“These factors are expected to be offset by lower domestic oil prices and lower prices of rice, fish and meat, as well as an appreciation of the peso,” it added.

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Indeed, slower inflation in August will help the Bangko Sentral ng Pilipinas justify its decision to cut its benchmark interest rate by 25 basis points (bps) to 6.25% at the August 15 Monetary Board (MB) meeting.

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Borrowing costs

The move unwinds previous tightening measures that pushed policy rates to a 17-year high to curb inflation. It also makes the Philippines one of the first Asian central banks to start an easing cycle ahead of the U.S. Federal Reserve, which is widely expected to cut rates for the first time in September.

The Bangko Sentral ng Pilipinas’ decision to cut borrowing costs came despite inflation breaching its 2% to 4% target range in July. But the monetary authority said price growth is expected to remain “on a downward trend” from August after the government further reduced tariffs on rice, a major staple for Filipinos.

The Philippine central bank continued to ease policy despite 6.3% economic growth in the second quarter, as favorable base effects masked weak consumption caused by high interest rates.

Bangko Sentral ng Pilipinas Governor Eli Remolona Jr. said markets can expect a “targeted” shift toward easier monetary policy from the central bank, adding that another 25 basis point rate cut could come at the central bank’s Oct. 17 or Dec. 19 meeting.

“Looking ahead, the Monetary Board will continue to adopt a prudent approach to ensure price stability that is conducive to balanced and sustainable growth of the economy and employment,” the BSP said.