Philippines: February inflation slips as transport inflation eases

Headline inflation settled at 8.6%YoY in February, below market expectations for an 8.9% rate. The dip in February can be traced to slower transport inflation (9.0% from 11.1%) and flat inflation for utilities (8.6%). Despite easing inflation for energy-related items, food inflation accelerated further to hit 10.8%YoY as supply-side remedies have yet to deliver relief. Meanwhile, core inflation quickened to 7.8%YoY (7.4% previous), the fastest pace seen since March 1999 showcasing how broad-based this episode of inflation has become.

Aside from supply constraints driving up food prices, robust demand side pressures were also evident in the pickup of inflation for recreation (4.4% from 4.2%), restaurants (8.1% from 7.6%) and personal care (5.3% from 5%). We expect inflation to remain sticky for the rest of the year with headline and core inflation likely only returning to target by December.

Despite the softer-than-expected headline inflation reading for February, we believe the Bangko Sentral ng Pilipinas (BSP) will still need to tighten policy further. With inflation easing slightly and falling below 9%, BSP will likely downshift to a 25bp rate increase at the 23 March meeting. BSP Governor Medalla recently shared that he would only consider a 50bp rate hike should headline inflation top 9%. Today’s inflation report solidifies our expectation that Governor Medalla can opt for a 25bp rate increase, taking the overnight reverse repurchase rate to 6.25%, which should likely be the peak for this tightening cycle.

The PHP will likely be pressured in the near term as softer inflation opens the door for a less aggressive policy response from the central bank.