UOB Group’s Senior Economist Julia Goh and Economist Loke Siew Ting review the latest inflation figures in the Philippines.

Key Takeaways

“Headline inflation accelerated for the third straight month to 5.4% y/y in May (from 4.9% in Apr), exceeding the 5.0% level for the first time since Dec 2018 and marking the highest rate since Nov 2018. The reading matched our estimate and Bloomberg consensus. It was again predominantly driven by higher food and transport costs amid persistent weakness in Peso (PHP).”

“Looking ahead, inflation is poised to stay above 5.0% for the rest of the year and into 1Q23 as the domestic economy continues to reopen, external supply shocks persist, and higher minimum wages further intensify second-round effects on inflation. This will lead to a higher inflation rate of 5.0% for the entire year of 2022 (compared to our previous forecast of 4.5%, BSP est: 4.6%, 2021: 3.9%) and 4.0% for 2023 (vs our earlier projection of 3.5%, BSP est: 3.9%).”

“The latest strong inflation outturn in May and rising inflation expectations would validate a second 25bps hike in the overnight reverse repurchase (RRP) rate by Bangko Sentral ng Pilipinas (BSP) at the upcoming monetary policy meeting on 23 Jun. The continued improvement in domestic economic activities, an expected 50bps hike in the US Fed Funds rate in Jun and Jul, and other central banks’ faster policy normalisation path are also strengthening the case for back-to-back BSP rate increases and moving in near lockstep with US rates. Hence, we revise our BSP rate hike call to 25bps in every remaining meeting of this year (vs +25bps each in 3Q22 and 4Q22 previously), bringing the RRP rate to 3.50% by end of 2022.”