THE Bangko Sentral ng Pilipinas (BSP) could pause its tightening cycle if inflation slows faster than expected and lower global energy costs feed through more quickly into domestic prices.
This contrasts with the prevailing expectation of continued but gradual tightening as inflation pressures remain elevated and second-round effects continue to shape policy decisions.
Citi, which still expects the BSP to deliver two additional 25-basis point hikes this year, said a change in the inflation momentum could prompt monetary authorities to keep rates unchanged beginning October.
The balance of risks was said to be increasingly tilted to the downside for Citi’s terminal rate forecast, particularly if easing global oil prices feed through more quickly into domestic costs than anticipated.
Weaker purchasing power could also prompt producers and retailers to adjust prices downward, potentially accelerating disinflation.
“With GDP [gross domestic product] growth not yet on a solid footing, consumer purchasing power likely remains soft,” Citi said.
“In this case, the momentum on inflation pervasiveness may peak or even reverse after the Aug[ust] meeting, leading BSP to pause from the Oct[ober] meeting onwards,” it added.
Citi said that domestic demand conditions could play a decisive role in shaping the policy path.
Slower growth momentum and weakening labor market indicators may limit the extent of further tightening, especially if inflation begins to move more decisively toward target.
GlobalSource Partners economist and former BSP deputy governor Diwa Guinigundo, meanwhile, pointed to easing inflation dynamics as giving the central bank more flexibility in calibrating monetary policy.
Still, he cautioned that inflation remained above the BSP’s 2.0 to 4.0 percent target range and that price pressures were becoming more broad-based, even if largely supply-driven.
He also highlighted emerging second-round effects, including wage adjustment pressures, transport fare petitions and rising utility costs that could keep underlying inflation elevated.
Guinigundo said the BSP’s challenge was increasingly about managing expectations rather than reacting to headline inflation movements.
He also warned that inflation expectations could become unanchored if policy credibility was not maintained.
“This is the essence of the BSP’s current policy dilemma,” Guinigundo said.
“Growth considerations argue for caution, while inflation dynamics argue for resolve. At this stage, credibility remains the more urgent objective.”
The size of the BSP’s rate hike — whether 25 or 50 basis points — is less important than the signal it sends, he said.
“The critical task is to demonstrate a clear commitment to returning inflation to target within the policy horizon.”
Households, businesses, and financial markets must remain confident that the BSP would take the necessary steps to restore price stability, Guinigundo continued.
“All up, therefore, the BSP’s challenge is no longer merely to lower inflation. It is to preserve the credibility of the inflation-targeting framework itself,” he said.
“Once expectations become unanchored, the economic cost of restoring price stability rises significantly.
The BSP’s policymaking Monetary Board last Thursday ordered a quarter-point increase that brought the benchmark rate to 4.75 percent, in line with market expectations.
BSP Governor Eli Remolona Jr. last week said that monetary authorities would continue to be guided by available data and that the latest 25-basis point increase was sufficient to keep inflation expectations anchored.
He warned, however, of continuing price pressures despite a US-Iran peace deal and said the central bank could deliver more rate hikes or even an off-cycle adjustment.
NIÑA MYKA PAULINE ARCEO
