INFLATION is expected to settle well below four percent this year, two global banks said, with one economist noting that only a steep rise in oil prices will push price increases beyond target.

Nomura economist Euben Paracuelles said oil price movements will be the biggest driver of Philippine inflation this year, even as he clarified that the overall hike in prices of basic goods is still on track to keeping within the 2-4% target range of the Bangko Sentral ng Pilipinas (BSP) for 2019.

“Our scenario analysis suggests crude oil prices are a bigger risk to the inflation outlook than the El Niño phenomenon,” Mr. Paracuelles said in a report published yesterday.

“By our estimates, however, it would take a substantial rise in oil prices (i.e., to an average $90/barrel) for full-year 2019 headline inflation to breach the BSP’s 2-4% target, in part because of favorable base effects and as food prices likely provide some offset.”

Monetary authorities have kept interest rates at the 4.25-5.25% range during their March 21 meeting, saying that they still need to confirm if the inflation downtrend will be sustained for the rest of 2019.

Last month’s inflation rate eased further to 3.3%, which pulled the three-month average to 3.8%.

However, BSP Governor Benjamin E. Diokno said policy makers need to remain watchful amid risks drawn from higher oil prices as well as the looming dry spell that will hit parts of the country possibly until October.

However, the sustained inflation slowdown is seen setting the stage for a policy rate cut, as well as a fresh reduction in the reserve requirement ratio (RRR) for big banks.

Nomura said the “relatively moderate” upside risks to prices “may provide BSP with scope to cut its policy rate in Q2” which would be earlier than the bank’s original forecast of monetary easing in July-September.

“In addition, we think the case for a near-term cut in the RRR remains clear, given easing inflation and tighter liquidity conditions, as indicated by interbank rates hovering near the top of BSP’s interest rate corridor,” Mr. Paracuelles added.

The 4.75% key rate remains at a decade-high after the BSP fired off a series of hikes totaling 175 basis points (bp) last year, which were meant to rein in inflation expectations after price spikes surged to as high as 6.7%. Food-led inflation has softened especially as the supply of rice and other crops has normalized as a result of government intervention.

Shortly after assuming office on March 6, Mr. Diokno said he sees room to ease policy interest rates and even to trim the 18% reserve standard for banks, but noted that such decisions will be data-dependent.

In a separate report, ING Bank N.V. Manila cautioned that authorities may be waiting too long to unwind last year’s rate increases.

“With inflation falling rapidly and expected to stay within target in 2019 and 2020, the BSP may run the risk of ‘falling behind the curve’ again with inflation held in check, growth momentum slowing and policy rates still at ‘crisis’ levels,” said ING Bank senior economist Nicholas Antonio T. Mapa.

“Back in 2018, hiking aggressively by 175bps was the equivalent of whipping out a rain jacket as the downpour ensued. But now that the sun is shining brightly and El Niño upon us. Perhaps it may be time to take off the rain coat as the heat wave saps growth momentum.”

Multilateral organizations also see a respite from inflation this year, coming from 2018’s 5.2% climb that was the fastest in nearly a decade. In turn, this is seen boosting private consumption at a time that public spending is seen slower due to delays in enactment of the P3.757-trillion 2019 national budget, coupled with global uncertainty that will hit goods exports.

The International Monetary Fund and the United Nations Economic and Social Commission for Asia and the Pacific have tempered their growth forecast for the Philippines to 6.5% this year, while the World Bank and the Asian Development Bank pencilled in 6.4% for 2019.

These compare to the downward-revised government target of 6-7%, which already factors in delayed projects and programs as a result of the budget impasse. In 2018, the economy expanded by 6.2%. — Melissa Luz T. Lopez