Inflation could drop below 4% by Q2 — ING

By Melissa Luz T. Lopez
Senior Reporter
DECEMBER inflation likely slid further, with ING Bank expecting the rate to drop below 4% by the second quarter, allowing the central bank to undo last year’s rate hikes.
ING Bank NV Manila senior economist Nicholas Antonio T. Mapa said he expects December inflation to come in at 5.5%, another marked drop from 6% in November.
This compares to the 5.2-6% forecast range given by the Bangko Sentral ng Pilipinas (BSP) for the month, and is lower than the 5.7% median estimate from BusinessWorld’s monthly poll.
The Philippine Statistics Authority will report official inflation data on Friday. If the ING forecast pans out, December will be the second month of receding inflation, after the indicator peaked in October at 6.7%.
Mr. Mapa said the slowdown in price increases is bound to sustain its decline.
“With the rice tariffication law all but waiting President Duterte’s signature and oil prices sliding to levels last seen in mid-2017, risks to the inflation outlook appear now more tilted to the downside although upward pressure looms with possible extreme weather conditions with El Niño forecast in the first half of 2019 while surprise OPEC supply cuts can cause crude oil’s recent plunge to reverse,” Mr. Mapa said in a market report published yesterday.
Expected to be signed into law is a bill that would remove import restrictions for rice, allowing the private sector to directly bring in the commodity more freely subject to a 35% tariff. Economic managers expect the entry of cheap rice from overseas to reduce the price of the staple by as much as P7 per kilogram.
On the other hand, world crude prices have been declining following one-year highs breached in October, a trend that is expected to be sustained early this year.
“With these supply-side oriented bottlenecks mitigated or removed, we can expect inflation pressures to dissipate quickly and the overall headline print to slide in 2019, barring any return of these supply issues,” he added.
Analysts have said that lower food and fuel prices will support lower inflation readings, but may be partly offset by a seasonal spike in selected goods due to stronger demand over the holiday season.
Inflation has averaged 5.2% as of end-November, matching the full-year 2018 estimate given by the BSP and shooting past the 2-4% target range. However, authorities are confident that inflation will ease to 3.2% this year.
Mr. Mapa said a sustained inflation downtrend will provide room for the central bank to ease reserve requirements for lenders and to slowly undo the 175 basis-point (bp) rate hikes it implemented last year.
Policy makers raised rates to the current 4.25-5.25% range to rein in inflation expectations, at a time when prices touched nine-year highs.
“Should inflation continue to trend lower and move within target as early as 2Q 2019, the BSP could move to unwind some of its aggressive hike cycle to help buttress forecasted slower GDP (gross domestic product) growth for the year,” the bank economist said.
Mr. Mapa is betting that the BSP will reduce bank reserves by another one percentage point in the first quarter, followed by a 25bp reduction in the key rate between April-June.