By Luisa Maria Jacinta C. Jocson, Reporter

HEADLINE INFLATION likely eased in August and returned to within the central bank’s 2-4% target band amid a drop in prices of rice and fuel, analysts said.

A BusinessWorld poll of 15 analysts yielded a median estimate of 3.7% for the consumer price index (CPI) in August. This is within the 3.2-4% forecast of the Bangko Sentral ng Pilipinas (BSP) for the month.

August inflation would also be slower than the nine-month high of 4.4% in July and the 5.3% print in the same month a year ago.

The Philippine Statistics Authority (PSA) is set to release August inflation data on Thursday (Sept. 5).

“Higher electricity rates and higher prices for agricultural commodities, owing to unfavorable weather conditions, are the primary sources of upward price pressures for the month,” the BSP said.

“These factors are expected to be offset by lower domestic oil prices as well as lower rice, fish, and meat prices along with the peso appreciation,” the BSP said.

Union Bank of the Philippines, Inc. Chief Economist Ruben Carlo O. Asuncion said August inflation likely slowed mainly due to the decline in rice prices.

“We expect the lower tariff rates for rice to be a key downward pressure on prices,” Sarah Tan, an economist from Moody’s Analytics, said in an e-mail.

Rice inflation eased to 20.9% in July from 22.5% in June, marking the fourth straight month of slower rice inflation. Rice typically accounts for almost half of overall inflation.

“August last year was the time when rice prices started to climb due to a global supply crunch. But due to lower tariff rates in 2024, rice prices have remained more or less stable, leading to headline CPI (consumer price index) dropping significantly on a year-on-year basis,” HSBC economist for ASEAN (Association of Southeast Asian Nations) Aris D. Dacanay said.

In June, President Ferdinand R. Marcos, Jr. slashed the tariff on rice imports to 15% from 35% until 2028 in an effort to tame rice prices.

Slower inflation “may primarily have been driven by food basket inflation, attributed to weak rice imports and heavy rainfall disrupting local food production,” Security Bank Corp. Chief Economist Robert Dan J. Roces said.

“These factors have likely led to sustained growth in domestic food prices, particularly affecting rice,” he added.

Meanwhile, analysts also noted that slower transport inflation may have contributed to inflation settling within BSP’s 2-4% target.

“The main drag from the 4.4% headline rate in July should come from a big fall in transportation inflation, going by the material drop in pump prices over the last few weeks,” Pantheon Chief Emerging Asia Economist Miguel Chanco said.

“Adding to the disinflationary impulse is the significant reduction in fuel prices throughout the month,” Mr. Dacanay said.

In August alone, pump price adjustments stood at a net decrease of P2.70 per liter for gasoline, P2.80 per liter for diesel, and P3.70 per liter for kerosene.

“We estimated a double-digit annual growth drop of 10% in retail petroleum prices, and diesel prices have the largest sales volume that could partially offset the estimated electricity rate hike of 6.7% year on year for August,” Mr. Asuncion said.

On the other hand, analysts also noted potential upside risks to inflation in August, such as the impact of Typhoon Carina and the southwest monsoon that hit Luzon in late July.

“The impact from Typhoon Carina that struck in July is expected to show up in August’s print in terms of higher prices for agricultural produce like vegetables,” Ms. Tan said.

Latest data from the Agriculture department showed that agricultural damage from Typhoon Carina and the southwest monsoon stood at P4.73 billion. Rice was the most affected crop, accounting for 22.9% or P1.08 billion of the overall damage.

“We believe that favorable base effects, especially for rice, will outweigh the lingering adverse impact of Tropical Depression Butchoy and Typhoon Carina on overall food prices,” Philippine National Bank economist Alvin Joseph A. Arogo said.

Also, Ms. Tan said utilities inflation likely accelerated in August as Manila Electric Co. (Meralco) raised electricity prices.

In August, Meralco hiked rates by P0.0327 per kilowatt-hour (kWh), bringing the overall rate of P11.6339 per kWh for a typical household from the previous month’s P11.6012 per kWh.

ROOM FOR MORE RATE CUTS?
With inflation likely in a downtrend, analysts expect that the central bank will be able to continue its easing cycle.

“Should the inflation print in August and the next couple of months confirm that July’s spike was just a blip, and that inflation is indeed in a downtrend as the BSP expects, this will give BSP confidence to deliver another rate cut in the fourth quarter,” Ms. Tan said.

In August, the Monetary Board reduced the target reverse repurchase (RRP) rate by 25 basis points (bps) to 6.25% from the over 17-year high of 6.5%.

This was the first time the BSP cut rates in nearly four years or since November 2020.

The BSP could further reduce rates in order to match any US Federal Reserve rate cuts, Rizal Commercial Banking Corp. Chief Economist Michael L. Ricafort said.

“We think this will support the BSP’s rate-cutting cycle and we expect at least another 25-bp cut in the fourth quarter. If the Fed cuts aggressively at 50 bps, the BSP is likely to match this rate cut,” Patrick M. Ella, economist at Sun Life Investment Management and Trust Corp., said.

Money markets are confidently pricing the Fed’s first 25-bp cut of this cycle at its September meeting, with a 33% chance of a jumbo 50-bp reduction, Reuters reported.

“Sustained deceleration in August could translate to one more RRP cut and a possible 0.5% to 1% reduction in the RRR before the year ends,” Bank of the Philippine Islands Lead Economist Emilio S. Neri, Jr. said.

BSP Governor Eli M. Remolona, Jr. earlier said that they can deliver another 25-bp rate cut in the fourth quarter.

For his part, Mr. Dacanay expects to see the policy rate at 6% by end-2024.

“We also expect core CPI to continue its gradual moderation, many thanks to the central bank’s tight grip on monetary policy, providing the BSP room to cut policy rates by 25 bps to 6% by yearend,” he added.

On the other hand, De La Salle University economist Mitzie Irene P. Conchada said there are some risks that could delay the BSP’s continued policy easing.

“External factors such as calamities and external events could affect inflation and result in an upward trend towards the end of the year.  Furthermore, I think that the BSP will keep its interest rates in its next policy meeting,” she said.

The BSP’s last two policy meetings of the year are scheduled on Oct. 17 and Dec. 19.

By Luisa Maria Jacinta C. Jocson, Reporter

BANK LENDING grew at its fastest pace in 19 months in July, preliminary data from the Bangko Sentral ng Pilipinas (BSP) showed.

Outstanding loans of universal and commercial banks rose by 10.4% year on year to P12.14 trillion in July from P11 trillion a year ago.

The July growth rate was the fastest since the 13.7% logged in December 2022.

On a seasonally adjusted basis, big banks’ outstanding loans inched up by 0.8% month on month.

The growth in outstanding loans to residents picked up to 10.4% in July from 10.1% a month prior. The increase in loans to nonresidents slowed to 9.2% in July from 9.8% in June.

BSP data showed that outstanding loans for production activities accounted for the bulk or 85.4% of overall lending.

Loans for production activities rose by 8.8% year on year to P10.37 trillion in July, faster than 8.3% in June.

This was mainly driven by an increase in loans for professional, scientific and technical services (438.3%), water supply, sewerage, waste management and remediation activities (28.2%), transportation and storage (20.6%), and mining and quarrying (20.4%).

Meanwhile, consumer loans to residents rose by 24.3% to P1.42 trillion in July. However, this was a tad slower than the 25% rate posted a month ago.

Broken down, double-digit growth was seen in credit cards (28.2%), motor vehicles (19.9%), and salary-based general purpose consumption loans (16.5%).

Rizal Commercial Banking Corp. Chief Economist Michael L. Ricafort said that  the continued growth in bank lending is a “good sign for the economy.”

Mr. Ricafort noted that bank lending growth was faster than the 6.3% gross domestic product (GDP) expansion in the second quarter.

However, Mr. Ricafort noted that credit growth was still dampened by “still relatively higher interest rates that made borrowings more expensive since 2022.”

From May 2022 to October 2023, the central bank has raised borrowing costs by a cumulative 450 basis points (bps).

“The pickup in bank loan growth in recent months could be attributed to improved business and economic conditions, especially in terms of improved data on employment in recent months,” Mr. Ricafort said.

For the coming months, he said that easing inflation and further policy rate reductions would help support loan activity.

The Monetary Board delivered a 25-bp rate cut last month, bringing the benchmark rate to 6.25% from the previous 6.5%, which was the highest in over 17 years.

BSP Governor Eli M. Remolona, Jr. has also signaled another possible 25-bp rate cut in the fourth quarter.

MONEY SUPPLY
Meanwhile, separate BSP data showed that domestic liquidity (M3) rose by 7.2% in July, faster than the 6.6% a month ago.

M3 — which is considered as the broadest measure of liquidity in an economy — jumped to P17.5 trillion in July from P16.31 trillion a year earlier.

Month on month, M3 inched up by 0.7%.

Domestic claims increased by 11.3% in July, faster than the 10.5% expansion in June.

“Claims on the private sector grew by 11.9% in July from 11.7% in June with the continued expansion in bank lending to nonfinancial private corporations and households,” the BSP said.

“Net claims on the central government expanded by 14%, up from 12.1% partly due to sustained borrowings by the National Government,” it added.

Meanwhile, net foreign assets (NFA) in peso terms increased by 11.2% in July from 8.3% in the previous month.

“The BSP’s NFA grew by 13.8%, while the NFA of banks contracted, largely on account of higher bills and bonds payable,” it added.

MORE FOREIGN PORTFOLIO investments entered the country than left in July, reflecting higher investments in government securities, data from the Bangko Sentral ng Pilipinas (BSP) showed.

Transactions on foreign investments registered with the central bank through authorized agent banks posted a net inflow of $1.38 billion in July. This was higher than $961.58 million in the same month a year ago.

It was also a turnaround from the $27.26-million net outflow recorded in June.

Foreign portfolio investments are called “hot money” because of the ease with which they can enter or leave a jurisdiction, as opposed to foreign direct investments, which are considered less fickle.

BSP data showed that gross inflows for the month more than doubled to $2.43 billion from $1.04 billion in June. Year on year, gross inflows jumped by 54.3% from $1.58 billion.

The bulk of investments (71.3%) went to peso government securities. This was followed by investments in Philippine Stock Exchange-listed securities, mainly banks, holding firms, property, transportation services, and food, beverage and tobacco (28.7%).

In July, investments mostly came from the United Kingdom, the United States, Singapore, Luxembourg and Norway — accounting for 93.7% of total foreign inflows.

Meanwhile, gross outflows slipped by 1.9% to $1.05 billion in July from $1.07 billion in June. Year on year, gross outflows surged by 70.6% from $614.93 million in July 2023.

The United States received nearly half (45.3%) of total outward remittances, equivalent to $475.35 million.

In the seven month period, short-term foreign investments yielded a net inflow of $1.46 billion, skyrocketing by 830.7% from the $157.3-million inflows in the same period a year ago.

Philippine Institute for Development Studies Senior Research Fellow John Paolo R. Rivera said that the higher net inflow in July was also due to “increasing investor confidence from developed economies due to improving macroeconomic indicators.”

Economic growth expanded by 6.3% in the second quarter, its fastest in five quarters. This was also faster than 5.8% in the first quarter and 4.3% in the second quarter of 2023.

Rizal Commercial Banking Corp. Chief Economist Michael L. Ricafort also noted more dovish signals from the US Federal Reserve and BSP that could support investment activity.

“For the coming months, possible Fed rate cuts later in 2024 up to 2026 could be matched locally and would lead to possible further gains in the fixed-income/bond markets and stock markets,” he said.

Money markets expect the Fed’s first 25-basis-point cut of this easing cycle at its meeting later this month.

BSP Governor Eli M. Remolona, Jr. has also signaled the possibility of delivering one more 25-bp rate cut in the fourth quarter.

This after the Monetary Board reduced rates by 25 bps last month to bring the key rate to 6.25% from the over 17-year high 6.5%.

“Likewise, fiscal consolidation in the Philippines is a good indicator of future economic performance as government spending is expected to be more targeted and productive,” Mr. Rivera said.

“This is supported by hot money coming in towards transportation, property, construction, services — all of which are booming especially in the foreseeable future,” he added.

The BSP expects foreign portfolio investments to end the year at a $3.1-billion net inflow. — Luisa Maria Jacinta C. Jocson