Philippine inflation spikes, but BSP likely to hike only 25bp in December
Lead — The Philippine inflation spike to 7.8% in October underscores significant energy-related pressures, yet the Bangko Sentral ng Pilipinas (BSP) is expected to limit its December rate hike to just 25 basis points, according to ING's latest insights. This cautious approach reflects a careful balancing act amid a backdrop of easing global oil prices and mixed trends in food inflation. Per the full note, inflation has now surpassed the BSP's target for the sixth consecutive month, mainly driven by fuel costs which added around 70 basis points to the overall CPI. Given the potential for an economic slowdown and peso strength, the case for a larger hike appears diminished, although risks in food prices related to El Niño impacts remain prominent.
What the desk is arguing
The desk contends that while Philippine inflation is a pressing concern, the BSP is unlikely to adopt a more aggressive monetary policy response than a 25 basis point hike in December. Older commentary from ING highlights that despite the inflationary surge, external indicators suggest a more measured tightening approach may be warranted due to stabilizing energy prices and the peso's recent appreciation.
Supporting evidence shows that the October inflation rate of 7.8% was primarily fueled by energy prices, with core inflation increasing to 5.4% from 4.8%. This aligns with fiscal prudence as the central bank weighs growth concerns against price stability.
The alternative view might suggest that the BSP could have pursued a more aggressive tightening path; however, the current trajectory of oil prices and underlying economic data does not support such a pivot at this time.
How firms align with this view
Aligned with the desk view
Contrary positioning
Key takeaways
- 01Philippine inflation rose to 7.8% in October, driven by energy prices.
- 02BSP expected to hike rates by only 25 basis points in December.
- 03Food inflation shows mixed trends, posing risks mainly from global agricultural pressures.
Market implications
Traders should keep an eye on USD/PHP movements around the anticipated BSP decision, particularly if inflation continues to trend higher and oil prices remain stable or decline. Any further appreciation of the peso could reinforce the BSP's cautious stance ahead of the December meeting.
Risks to this view
A sudden spike in global oil prices or a geopolitical escalation affecting energy costs could force the BSP into a more hawkish stance, necessitating a reassessment of future interest rate hikes. Additionally, severe weather impacting food supply due to El Niño could exacerbate inflationary pressures.
Older quick take Quick take Published 04:31 Philippines Translate Philippine inflation spikes, but BSP likely to hike only 25bp in December The Philippines’ inflation surge to 7.8% in October was substantial, driven largely by energy price shocks. However, if oil prices continue to ease, third-quarter growth proves soft, and the peso extends its recent gains, we expect the central bank to scale back to a 25bp hike in December Fuel prices drove almost the entire the surge in CPI inflation Philippine inflation surged to 7.8% year-on-year in October from 7.2% in September, in line with our forecast but above the consensus expectation of 7.6%. The acceleration was almost entirely driven by higher fuel and electricity prices.
They added around 70bp to headline inflation, while non-rice food inflation fell by 30bp. Core inflation also picked up sharply, rising to 5.4% y/y from 4.8%, largely reflecting higher transport fares and stronger price pressures in restaurant and hotel services. It’s above the central bank’s target for the sixth month in a row.
Food inflation trends were more mixed. Rice inflation remained elevated at 20.7% y/y but was broadly unchanged from the previous month. More notable, however, was the easing in non-rice food inflation.
This is driven largely by softer price increases for vegetables and seafood, providing some offset to higher energy-related inflation pressures. BSP to remain cautious, though the case for another jumbo hike could fade Risks to food inflation remain skewed to the upside given the recent increase in rice prices across Asia. Prices of food items that are typically more sensitive to El Niño-related weather disruptions, such as vegetable oils and corn, remain elevated in the Philippines relative to previous severe El Niño episodes.
While food inflation risks remain a concern, the sharp decline in global oil prices in recent weeks, amid improving prospects for a de-escalation of US-Iran tensions, should provide some relief to fuel and transport costs going forward. As such, the near-term inflation outlook remains challenging. But softer energy prices could help offset part of the upside pressure from food inflation.
From the Bangko Sentral ng Pilipinas’ (BSP) perspective, October inflation came in strong but remained within its forecast range, making the outcome largely unsurprising. Indeed, the earlier 50bp jumbo rate hike was likely delivered largely in anticipation of this inflation surge. Looking ahead, developments around Iran following the US mid-term elections, coupled with a weaker USD and lower oil prices, suggest the BSP may prefer to assess the cumulative impact of past tightening before moving aggressively again.
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