Philippine inflation at near 2-year low but rates likely to stay elevated

MANILA: Philippine inflation slowed to its weakest in nearly two years in December but full-year readings remained outside the central bank's target zone, diminishing chances of near-term rate cuts.

The central bank did not waver on Friday (Jan 5) from its stance in early December that policy settings would stay "sufficiently tight", underscoring concerns about inflation despite a slowdown in the pace of price gains.

The consumer price index in December rose 3.9 per cent from a year earlier compared with 4.1 per cent in November, the statistics agency said on Friday, the slowest since February 2022 and the third straight month that inflation has eased.

That brought the 2023 average inflation rate to 6.0 per cent, still way outside the central bank's 2-4 per cent target.

"The Monetary Board deems it necessary to keep monetary policy settings sufficiently tight until a sustained downtrend in inflation becomes evident," the Bangko Sentral ng Pilipinas (BSP) said in a statement following the data.

"The BSP will continue to monitor inflation expectations and second-round effects and take appropriate action as needed to bring inflation back to the target," it added.

Economists in a Reuters poll had forecast annual inflation of 4.0 per cent in December, within the central bank's 3.6 per cent to 4.4 per cent projection for the month.

Core inflation, which strips out volatile food and energy prices, was at 4.4 per cent in December versus 4.7 per cent in the previous month.

Among the main contributors to slower inflation was a decline in food inflation to 5.5 per cent in December from 5.8 per cent in November, the statistics agency said.

The central bank kept its benchmark interest rate steady at 6.5 per cent for a second straight meeting in December, after a series of rate increases to rein in inflation, including an off-cycle hike in October.

It meets for the first time this year on Feb 15.

"We think that the BSP has sufficiently tightened despite additional supply side risks," said Domini Velasquez, chief economist at China Banking Corp in Manila.

"However, even if the BSP stands pat, which is the likely scenario, we think that the central bank will not be in a hurry to cut rates due to the risks," added Velasquez, who has penciled in rate cuts by the second half of 2024.