Inflation back on track at one-year low

By Christine Joyce S. Castañeda
Senior Researcher
INFLATION eased for the fourth straight month and on to target in February to post the lowest reading in 12 months, helped by milder increases in the prices of food and beverages, the Philippine Statistics Authority (PSA) reported on Tuesday.
Preliminary PSA data showed inflation last month at 3.8%, slower than January’s 4.4% and matching February 2018’s pace.

The February reading was lower than the 4.1% estimate median in BusinessWorld’s poll of 13 economists late last week. The latest figure also fell within the 3.7-4.5% estimate which the Bangko Sentral ng Pilipinas’ (BSP) Department of Economic Research gave for the month.
The better-than-expected pace marked the fourth straight month of deceleration from the nine-year 6.7% peak recorded in September and October last year.
The preliminary result brought the year-to-date average to 4.1% — still above the BSP’s 2-4% target band and 3.1% forecast average for the year, which compares to 2018’s 5.2%.
Core inflation, which strips volatile prices of food and energy items, clocked 3.9% last month slower than January’s 4.4% albeit faster than the 3% in the same period last year.
The latest inflation figure, however, will not necessarily lead to monetary policy easing when the Bangko Sentral ng Pilipinas (BSP) Monetary Board conducts its second policy review on March 21, Deputy Governor Diwa C. Guinigundo told reporters in a mobile phone message after data were released. It maintained policy in its first 2019 review on Feb. 7.
The data showed lower increments in the heavily weighted food and non-alcoholic beverages at 4.7% last month from 5.6% in January and 4.8% in February 2018.
Food-alone inflation eased to 4.2% versus the previous month’s 5.1% and 4.8% a year ago.
With the exception of education and communication, the rest of the subindices posted slower upticks during the month as well.
Economists attributed the better-than-expected reading to the slower increase in the prices of food and non-alcoholic beverages.
“The basket-heavy food index, the bane of 2018 inflation, helped keep price gains in check in 2019…With [food and non-alcoholic beverages] inflation at 4.7% from 5.6% in January, the headline print slid as well, this time back within target after almost a year,” said Nicholas Antonio T. Mapa, senior economist at ING Bank N.V. Manila.
“Food prices are now tamer given improved weather and supply conditions while the waning effects after the tax on sugar drinks fade on non-alcoholic drinks.”
Ruben Carlo O. Asuncion, chief economist at Union Bank of the Philippines, Inc. (UnionBank), likewise cited the prices of food items as the main drivers of inflation’s slowdown, in particular, the prices of rice and corn.
The rice and corn indices in February stood at 2.9% and -0.3%, respectively, compared to 4.7% and 0.9% in January.
With the exception of fish, whose inflation rate steadied at 7.8%, the rest of the food items recorded slower annual mark-ups.
“With inflation now back within target, we expect the BSP to factor this in as the inflation path forecasted by the BSP continues to pan out,” ING’s Mr. Mapa said.
“If this trend continues, this could give the central bank the leeway to ease back on policy by way of RRR [reserve requirement ratio] cuts as early as [the first quarter] and a possible policy rate cut by May.”
In a report, economist Noelan Arbis at HSBC Global Research, said: “We expect monetary accommodation to first come in the form of RRR cuts,” adding that he expects “a 100-[basis point] cut in banks’ RRR in the second quarter.”
On the other hand, economists Mustafa Arif and Sanjay Mathur of ANZ Research said in a report that they expect the BSP to keep rates unchanged in its next meeting.
REDUCTION OF INTEREST RATES PREMATURE?
Despite market expectations of loosening monetary policy, BSP’s Mr. Guinigundo said that the lower-than-expected inflation will not necessarily trigger interest rate cuts or reduce bank’s required reserves.
“We continue to consider our current monetary settings as appropriate given the emerging risks both here and abroad. However, the Monetary Board will be meeting this month precisely to review the stance of monetary policy given the expected new data that would be available from now until the next meeting against the backdrop of a softening global economy,” he told reporters.
“It may be premature to talk about a possible reduction in either the policy rate or the RRR [reserve requirement ratio] at this time considering that the year-to-date inflation remains above the target of 2-4%. More important, our latest forecasts for the next two years are anchored on the current policy rate of 4.75%,” he added.
“But these policy issues will remain on the table. Timing is the crucial issue.”
In a separate statement, the central bank said: “The latest inflation outturn is consistent with the BSP’s expectation of the continued easing of price pressures.”
“Inflation will likely settle within the target range in 2019 and 2020 as previous monetary and non-monetary policy actions work their way through the economy. The recent enactment of the rice tariffication act will further temper rice prices in the near term and help raise long-run productivity in the agricultural sector. The BSP continues to keep a close watch over price developments in the country and shall consider all relevant information at its next monetary policy meeting on [March 21, 2019] to ensure that the monetary policy stance remains consistent with the BSP’s primary mandate of safeguarding price stability.”
OUTLOOK
In a joint statement, the Department of Finance, National Economic and Development Authority and the Department of Budget and Management said that inflation is starting to become more manageable.
“With these developments, we are optimistic that the downward path of inflation will continue for the rest of the year. This will be backed by the recent enactment of the Rice Industry Modernization Act (Republic Act No. 11203), which is expected to bring down rice prices and cut inflation by 0.5-0.7 percentage point this year and 0.3-0.4 percentage point next year,” the statement read.
The rice tariffication law, which liberalizes the import process for the staple while taking away the role in importing of the National Food Authority, took effect yesterday.
“We must ensure that the change to a rice tariff regime — from government-led to market-led — is seamless and fast,” the statement further read.
The country’s economic managers flagged the expected onset of El Niño, which could last until June.
All in all, economists expect inflation to continue its deceleration in the coming months.
“Inflation will continue to trend lower and remain within target, barring any supply-side shock from El Niño and or oil price shock,” said ING’s Mr. Mapa.
“The rice tariffication law will help ensure that the food basket sees less volatile price movements as we can import to augment local supplies.”
Similarly, UnionBank’s Mr. Asuncion anticipates inflation to continue to decline, especially as food price increases slow further.
“With global oil prices expected to decline further in the longer-term due to supply issues and US shale production, local headline inflation is expected to thread the government’s target of 2-4%,” he said.
HSBC’s Mr. Arbis expected headline figure to be “closer to the target midpoint” in the second quarter and fall below the 3% mark in the third quarter, averaging 3.3% for the year. — with Melissa Luz T. Lopez