Inflation is expected to settle within the Bangko Sentral ng Pilipinas (BSP)’s two to four percent target band by year-end, but lingering upside risks from food supply shocks and a weaker peso could keep monetary authorities cautious in the coming months, according to Manulife Investment Management.
Jean de Castro, head of fixed income for Manulife Investment Management, said the BSP’s forecast of 1.5 to 2.3 percent for September signals a return to target after six months of below-range inflation.
‘Supported by lower rice import tariffs and subdued global oil prices, inflation is expected to return to the two to four percent target band by the end of 2025,’ De Castro said.
Inflation in the Philippines eased to 3.2 percent in 2024 from an average of six percent in 2023. This year, consumer price growth has been muted, with inflation hovering below target for six straight months.
However, De Castro warned of lingering upside risks, citing ‘sticky food prices due to supply shocks stemming from typhoons and the extended rice import ban,’ as well as peso weakness beyond the 58-per-dollar level.
Against this backdrop, September inflation is widely expected to pick up from the 1.5 percent print in August as the effects of higher food prices begin to filter through. The Philippine Statistics Authority is scheduled to release the inflation data today.
Looking ahead to the Monetary Board’s policy meeting on Oct. 9, De Castro said the BSP is widely expected to keep the key rate unchanged at five percent, following three cuts earlier this year.
‘Given the impact of typhoons on food supply, and the peso’s recent breach of 58 to $1, we can expect the Monetary Board to adopt a cautious stance and pause at the upcoming Oct. 9 meeting,’ she said.
Still, she added that another cut remains possible in December if growth momentum weakens or if the US Federal Reserve eases further.
De Castro noted that a pause would likely keep the yield curve stable, with short-term yields anchored and longer tenors supported by contained inflation expectations.
‘On the other hand, a surprise cut could result in a flattening of the yield curve, encouraging more demand for longer-dated bonds and supporting loan growth, but may also heighten sensitivity to the currency and food price risks,’ she said.
For investors, she recommended a ‘dual approach’ of holding short-term tenors for flexibility amid policy uncertainty while selectively adding longer tenors to lock in current yields.
‘With short-term yields at multi-year lows and long-term yields near one-year lows, maintaining a defensive duration stance is advisable until inflation risks – especially from food and the currency – are better contained,’ she added.
Meanwhile, foreign direct investment (FDI) inflows continue to pose a challenge. Net inflows dropped by 17.8 percent year-on-year to $376 million in June, the smallest since December 2024, bringing first-half inflows to just $3.4 billion.
‘For fixed-income securities, persistent FDI weakness may keep yields elevated, but a recovery, specifically if infrastructure and reforms gain traction, could enhance liquidity, lower long-term rates and improve the relative attractiveness of Philippine bonds,’ De Castro said.