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July inflation slowest in 31 months

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INFLATION eased further in July, the Philippine Statistics Authority (PSA) reported on Tuesday, lending support to expectations for the central bank to continue loosening monetary policy.

The PSA reported that the country’s headline inflation rate slowed to 2.4% in July from 2.7% in June and 5.7% in July 2018.

Headline inflation rates in the Philippines (July 2019)

It matched the 2.4% inflation reading in July 2017 and was the slowest in 31 months or since December 2016’s 2.2%.

The July result fell within the Bangko Sentral ng Pilipinas (BSP) Department of Economic Research’s 2-2.8% estimate for the month and matched the 2.4% median estimate in a poll of 18 economists and groups which BusinessWorld conducted late last week.

Headline inflation averaged 3.3% year-to-date, still past the midpoint of the BSP’s 2-4% target band for 2019 and above the downward revised 2.7% full-year forecast average.




Core inflation — which excludes volatile food and energy items in the consumer price index (CPI) — clocked in at 3.2% last month, slower than June’s 3.3% and 4.5% in July last year.

In a text message to reporters, BSP Governor Benjamin E. Diokno said that July’s inflation rate lay at the midpoint of the BSP’s forecast for July, “[h]ence, it is not a surprise at all.”

The PSA attributed the July deceleration primarily to the slower increase in prices of the heavily-weighted food and non-alcoholic beverages component at 1.9% from 2.7% in June.

“Almost all subsectors posted slower price gains than the previous month, save for education, as base effects of last year’s implementation of free tertiary education faded,” said ING Bank NV Manila senior economist Nicholas Antonio T. Mapa in an e-mail to reporters.

“Key to the deceleration trend was the fall in the average retail price of rice in the month of July with the rice tariffication law kicking in,” said Mr. Mapa, adding that lower electricity rates and lower fuel pump prices also contributed to the inflation slowdown.

“It is also worth noting that a stronger peso had a hand in slower inflation for the month of July, helping lower the cost of imported raw materials.”

Rizal Commercial Banking Corp. (RCBC) economist Michael L. Ricafort shared this assessment, saying in an e-mail: “Lower inflation [is] largely due to easing prices of food, especially rice, stronger peso exchange rate, lower global crude oil prices, lower electricity prices, and higher base effects…”

The food-alone index, which accounts for 35% of the average household’s consumer basket, eased to 1.7% in July versus the 2.6% reading in June and 6.8% in July 2018. In particular, rice — which accounts for 10% of the basket — saw its annual rate decline further by 2.9% from a 1.7% contraction in June.

“Rice was among the biggest contributors to the increase in headline inflation in 2018, having added 1 percentage point (ppt). It is now subtracting 0.27 ppt from the headline [inflation rate],” Chidu Narayanan, Asia economist at Standard Chartered, said in an e-mail to reporters.

In a separate note, HSBC Global Research economist Noelan C. Arbis said that the contribution of food, alcoholic drinks and tobacco prices to inflation are at “their lowest levels in nearly three years” or since October 2016, which marked a “sharp reversal” from last year’s trend.

Aside from food and non-alcoholic beverages, slower annual increments in July were also observed in alcoholic beverages and tobacco (8.8% from June’s 9.3%); housing, water, electricity, gas and other fuels (2.2% from 3.0%); furnishing, household equipment and routine maintenance of the house (2.9% from 3.1%); and transport (0.7% and 1.6%).

ROOM TO CUT INTEREST RATES?
Robert Dan J. Roces, Security Bank Corp. Treasury Group assistant vice-president and chief economist, said the inflation downtrend gives the BSP room to continue reversing its 175-basis point (bp) rate hike last year after a 25 bp reduction in May. “[W]e expect BSP to resume cutting rates by at least 25 bps to support and pump-prime economic growth,” Mr. Roces said.

Likewise, ING’s Mr. Mapa said it is “widely expected” that the BSP will be cutting rates when the central bank’s Monetary Board meets on Thursday for its fifth policy review for the year. “[BSP Governor Benjamin E. Diokno] has telegraphed up to 50-bps worth of rate cuts for the balance of 2019 and we believe we will see at least a 25-bp rate cut (with door open for 50 bps) all the more given that second quarter GDP (gross domestic product) is likely to settle below the 6% handle,” Mr. Mapa said.

For HSBC’s Mr. Arbis, the benign inflation trend “opens the door” for further monetary easing. “[W]e expect the BSP to cut its policy rate by 25 bps to 4.25% at its upcoming meeting… and expect an additional 25-bp cut by year-end. Moreover, we expect another 100-bp cut to the reserve requirement ratio (RRR) in [the fourth quarter], bringing it down to 15% by the end of the year,” he said.

For his part, RCBC’s Mr. Ricafort said that the recent decision by the US Federal Reserve to cut interest rates by 25 bps last Wednesday would also “provide some leeway” for other central banks including the BSP to do a corresponding cut on their respective interest rates.

BSP’s Mr. Diokno has cited the July inflation rate, second-quarter GDP growth and “a host of other developments locally and abroad” as key considerations in determining the “appropriate policy stance” for their meeting on Thursday.

The BSP cut benchmark interest rates by 25 bps in its May 9 policy review, partially dialing back a cumulative 175-bp hike last year in the face of successive multi-year-high monthly inflation rates. It also cut the reserve requirement ratio by 200 bps to 16% for big banks and to six percent for thrift banks.

OUTLOOK
The National Economic and Development Authority (NEDA) said in a statement that it expects inflation to settle within the government’s 2-4% target this year.

“We welcome this decelerating trend in prices, but we remain on guard against possible upside risks such as adverse weather conditions, possible entry of the African swine fever, and uncertainty in the global oil market, among others,” Socioeconomic Planning Secretary Ernesto M. Pernia, NEDA’s director-general, was quoted as saying.

HSBC’s Mr. Arbis said: “We expect headline inflation to average three percent in 2019, factoring in possible upside surprises during the typhoon season,” adding that “[o]ur current trajectory indicates that headline inflation is tracking to average 2.7% for 2019 barring any significant shock to food prices due to inclement weather.”

Euben Paracuelles, senior economist for Southeast Asia at Nomura Securities Company Ltd.’s Research Division, likewise expects inflation to ease further. “Our CPI inflation forecast implies CPI inflation will fall to around 2.1% in [the third quarter] and 2.3% in [the fourth quarter] from the year-to-date average of 3.3%, driven by factors similar to those in June and July, and more favorable base effects from excise tax adjustments… last year,” he said in a note. — Marissa Mae M. Ramos and Mark T. Amoguis

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