Inflation likely quickened in January

By Luz Wendy T. Noble

INFLATION likely quickened further in January mainly on the back of an uptick in food prices, some supply side shocks from the Taal Volcano eruption and continued diminishing base effects, analysts said in a BusinessWorld poll, with the central bank seen easing rates this week ahead of emerging risks to prices.

A poll held last week among 13 economists yielded a 2.7% median estimate for January headline inflation, close to the lower end of the 2.5% to 3.3% estimate range given by the Bangko Sentral ng Pilipinas (BSP) last Friday.

If realized, this would be the third consecutive month of faster inflation and will be a pickup from the 2.5% pace logged in December. However, this is still slower compared with the 4.4% logged in January 2019 and is well within the 2-4% target for the year.

The Philippine Statistics Authority will report official January inflation data on Wednesday (Feb. 5). The BSP’s Monetary Board will meet to review their policy settings for the first time this year on Thursday, Feb. 6.

“Unstable prices in some occasions has brought about the erratic behavior of prices which affect stability in the economy plus unexpected natural calamities,” Colegio de San Juan de Letran Graduate School Dean Emmanuel J. Lopez said in an e-mail.

Security Bank Corp. Chief Economist Robert Dan J. Roces said these cost-push effects from the Taal eruption “appear to be moderate” and “may be fully felt by February, if at all, as agricultural activities resume in the area.”

BSP Governor Benjamin E. Diokno earlier said inflation is likely to stay stable despite risks from the Taal Volcano eruption.

The government estimates that foregone income from the incident is between P4.3 billion to P6.7 billion, which could result to a dent in the output growth within the Calabarzon Region for the first quarter.

The Philippine Institute of Volcanology and Seismology has already lowered Taal Volcano’s alert status to Level 3 from Level 4 on Jan. 26, two weeks since its eruption activities started. This has allowed some residents from several towns to be allowed to return to their homes.

Aside from the Taal eruption, the African Swine Fever (ASF), which caused prices of pork substitutes to rise, continues to be an upside risk to inflation, according to Rizal Commercial Banking Corp. Chief Economist Michael L. Ricafort.

“The ASF would remain to be a threat in terms of some pick up in the prices of fish, chicken, beef, and other alternative meat products,” he said in an e-mail.

Meanwhile, Thatchinamoorthy Krshnan, economist at Oxford Economics, pointed out that the “base effects that caused inflation to pick up in December should continue to affect January 2020 inflation but to a smaller extent.”

Central bank officials earlier said inflation is likely to settle within the midpoint of the BSP’s 2-4% target range this year, with risks tilting slightly upward.

RATE CUT ON THE TABLE
Amid continued upside risks to inflation, 10 out of the 13 economists who participated in last week’s poll said the central bank would probably cut rates by at least 25 basis points (bps) this week.

Key policy rates currently stand at four percent for the overnight reverse repurchase facility, while overnight deposit and lending rates are at 3.5% and 4.5%, respectively.

This, following 75 bps worth of rate reductions last year, which partially offset the 175 bps in hikes done in 2018 to quell inflation.

Emilio S. Neri, Jr., lead economist at Bank of the Philippine Islands (BPI), is of the view that the Monetary Board (MB) is “aware of the risk that the window for cutting rates is starting to close.”

“If they don’t cut on the sixth [of February] they might miss their chance to do so for the rest of 2020 as there are a number of risk factors emerging that may lead to a faster inflation trajectory for the rest of the year,” Mr. Neri said in an e-mail.

Central bank officials have flagged several upside risks to inflation for this year, including volatile oil prices due to Middle East tensions, impact of the ASF on selected items, the hike in excise taxes on alcoholic beverages following the new sin tax law, as well as pending petitions for electricity rate adjustments.

Mr. Diokno has said the central bank will not be “as aggressive” in cutting rates this year compared to 2019, still looking to cut rates by at least 50 bps, with a 25-bp cut on the cards as early as this quarter.

The MB will hold a policy setting meeting twice in the first quarter — on Feb. 6 and on Mar. 19.

“With the growth outlook dimming on a global scale and with the domestic economy needlessly hampered by previous policy tightening, follow through easing may help ensure that the Philippines can safely navigate the more challenging environment,” ING Bank NV-Manila Senior Economist Nicholas Antonio T. Mapa said.

The coronavirus outbreak may also be taken for consideration for another possible rate cut, according to Capital Economics’ Asia Economist Alex Holmes.

“It’s a close call, but given the potential impact of the coronavirus on the tourism industry we think the [central] bank will opt to ease sooner rather than later,” Mr. Holmes said.

Meanwhile, for ANZ Research Economist Mustafa Arif, Mr. Diokno’s comments on a first-quarter rate cut may suggest that the BSP will ease in March instead of this week amid risks coming from higher prices in the near term due to weather disruptions.

“Furthermore, expectations of a higher fiscal impulse this year suggest that the BSP can afford to be less aggressive,” Mr. Arif said.

In terms of reductions in reserve requirement ratio (RRR) for banks, BPI’s Mr. Neri said that the BSP is likely to keep current levels and to look for more evidence of faster loan growth before going for another cut.

“They can continue to deliver RRR cuts as long as inflation remains comfortably below the policy rate,” Mr. Neri said.

After 400 bps worth of cuts in 2019, the reserve requirement ratio for big banks is now at 14%, while the RRR for thrift and rural banks are at five and three percent, respectively.

The Monetary Board likewise reduce RRR for nonbank financial institutions with quasi-banking functions to 14%.

Mr. Diokno has vowed to reduce the reserve requirement of big banks to the single-digit level by the end of his term in mid-2023.