Poll sees steady policy as inflation eases

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By Melissa Luz T. Lopez
Senior Reporter

INFLATION likely slowed further in January as food prices sustained a decline, analysts said in a BusinessWorld poll, adding that this should enable the central bank to keep interest rates steady for the second straight meeting.

A poll among 12 analysts yielded a 4.5% median estimate for January inflation, which falls closer to the low end of the 4.3-5.1% range given by the Bangko Sentral ng Pilipinas (BSP). If realized, it would also mark the third straight month of a lower inflation reading from a peak of 6.7% in September and October, but would still be higher than the 3.4% pace recorded in January 2018.

Analysts’ January Inflation, February Policy Rates Expectation

The Philippine Statistics Authority will release official inflation data tomorrow.

“Our estimate is 4.5% as food supplies stabilize and the impact of new round of excise tax is cushioned by the relatively slower pace of oil price increases and lower price of electricity,” said Alvin P. Ang, economics professor at the Ateneo de Manila University.

Michael L. Ricafort, economist at the Rizal Commercial Banking Corp., pointed out that lower food prices will keep inflation at bay amid improved supply of vegetables and chicken, while rice supply has normalized.

And a measure now up for signing by President Rodrigo R. Duterte that will supplant rice import quotas with a regular tariff scheme is expected to slash retail prices of the staple by about P7 per kilogram, and hence inflation by up to 0.8 percentage point.

The BSP expects inflation to maintain its decline this year, noting that prices will crawl back to the 2-4% target band and end the year at 3.2%, from the 5.2% clocked in 2018.

In a Jan. 25 letter to Mr. Duterte, the BSP went on to explain that “supply-side factors” drove 2018 inflation to shoot past the government target.

“The cumulative 175-basis-point (bp) hike in the key policy interest rate was aimed at anchoring the public’s inflation expectations to help ensure that the price pressures would not evolve into sharper gains in wages, transportation fares, and prices of other goods and services,” read the letter signed by then-BSP officer-in-charge Deputy Governor Chuchi G. Fonacier.

“Looking ahead, we are optimistic that inflation will continue to ease in the coming months given our monetary tightening in 2018 as well as the NG’s decisive anti-inflation measures, including the liberalized importation of key commodities such as rice, meat, fish and sugar.”

“We assure the President and the Filipino people that the BSP shall continue to confront inflation with an appropriate and vigilant stance of monetary policy.”

Latest BSP forecasts show that inflation will likely settle back to below four percent by the end of the first quarter, with base effects seen to keep inflation in the coming months muted versus a year ago.

All market watchers asked in last week’s poll were certain that policy rates will be untouched during Thursday’s review, taking the cue from softening inflation plus the dovish tone taken lately by BSP officials.

The 12 economists said that the Monetary Board will keep the benchmark at the 4.25-5.25% range in its first policy review this year, while continuing the pause at the Dec. 13 meeting.

“Overall, we expect the BSP to remain on hold for a while as the economy adjusts to the tightening undertaken in 2018,” ANZ Research economist Mustafa Arif said in a report published Friday.

Two senior BSP officials said last week that monetary policy makers need to let previous rate hikes be absorbed by the financial system and assess their impact before making any further policy tweaks.

On the other hand, some analysts expect that monetary authorities will first cut banks’ reserve requirement ratio (RRR) before adjusting benchmark rates.

“BSP will likely cut reserve requirements by 200bp to ease bank’s liquidity issue. This is not yet a policy stance change because it’s meant to address specific banking system needs due to Basel 3,” said economics professor Victor A. Abola of the University of Asia & the Pacific.

Governor Nestor A. Espenilla, Jr. said there is now scope to pursue further cuts to the 18% reserve requirement ratio for big banks, which will follow two reductions introduced early last year.

Others, however, said such adjustments may come in the months ahead.

“Given that the bank vows to be ‘data dependent,’ the BSP will likely put off these possible moves until more data does indeed confirm that inflation is decelerating, expectations well-anchored and growth momentum is fading,” added Nicholas Antonio T. Mapa, senior economist at ING Bank N.V. Manila.

The BSP paused with the reserve reduction last year as inflation became its top concern.

Still, the cuts form part of Mr. Espenilla’s long-term goal of bringing down the RRR to single- digit levels by 2023, or when his six-year term as governor ends.