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Slower inflation gives BSP policy space

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By Mark T. Amoguis Researcher
and Melissa Luz T. Lopez Senior Reporter

THE OVERALL INCREASE in prices of widely used goods cooled for the third straight month in January, marking the slowest year-on-year reading in 10 months and making the case for monetary authorities to keep interest rates steady at their meeting on Thursday.

Preliminary data which the Philippine Statistics Authority (PSA) released on Tuesday showed January inflation at 4.4%, slower than December’s 5.1% albeit faster than the 3.4% pace in January 2018.

January’s actual rate compares to the 4.5% median estimate in BusinessWorld’s poll of 12 economists and analysts late last week. It was, however, within the Bangko Sentral ng Pilipinas’ (BSP) 4.3-5.1% range for that month.

January’s reading marked the third straight month of decelerating inflation from a nine-year-high 6.7% in September and October and was the slowest since the 4.3% recorded in March last year.

Core inflation, which strips volatile prices of food and energy items, was 4.4% last month versus December’s 4.7% and January 2018’s 2.6%.

Headline inflation rates in the Philippines (January, 2019)

“Demand pressures are clearly receding given the sustained moderation in core inflation. The government’s non-monetary measures to ensure ample supply of key food commodities turned the tide against food price upsurge,” BSP Deputy Governor Diwa C. Guinigundo told reporters in a mobile phone message.

PSA data noted slower increments in the heavily weighted food and non-alcoholic beverages, which increased by 5.6% in January from 6.7% in December and 4.4% in January last year.

Other commodity groups that contributed to the slowdown were alcoholic beverages (16.1% from 21.7% in December); clothing and footwear (2.5% from 2.8%); housing, water, electricity, gas, and other fuels (four percent from 4.1%); health (4.3% from 4.8%); and transport (2.5% from 4%).

The food-alone index slowed to 5.1% from 6.3% in December. Specifically, decelerations were observed in the indices of rice (4.7% from 6% in November), meat (five percent from 5.5%); fish (7.8% from 9.9%), vegetables (5.6% from 8.1%); and fruits (2.2% from 3.8%).

“This clearly validates the lack of persistence of supply price pressures experienced for the most part of 2018 when oil prices surged by 60% with similarly sharp upturns in the prices of rice, meat, fish and vegetables,” Mr. Guinigundo said.

Nicholas Antonio T. Mapa, senior economist at ING Bank N.V. Manila, said that the January print was in line with the expectations. “Any cost push driven inflation pop tends to dissipate quickly once supply bottlenecks are mitigated. This trend will continue in next few months, barring any tightness in food supply or spikes in oil prices,” Mr. Mapa said.

The better-than-expected inflation result also makes room for the BSP to maintain benchmark rates in its first policy review for the year this Thursday.

“This latest positive outcome in inflation management gives the BSP more space to review its current monetary policy. With modest demand pressures, monetary policy could be slight on the brake,” Mr. Guinigundo added, echoing the dovish cues he gave last week.

The BSP official said on Friday that monetary authorities should not “immediately reverse course” on monetary policy, as they need to review how previous tightening moves are absorbed by financial markets and the economy before further adjustments can be made.

The Monetary Board fired off five consecutive rate hikes totaling 175 basis points (bp) last year to arrest surging inflation, marked with a back-to-back 50 bp tightening move just as prices were surging to multi-year highs.

In December, the BSP found scope to keep policy settings steady at the 4.25-5.25% range amid signs that inflation is on its way down, marked by two consecutive months of a sharp decline.

At the same time, Mr. Guinigundo has cautioned calls for the BSP to swiftly reduce bank reserves, as he highlighted the need for “tight” liquidity conditions before further cuts can be considered. He said that year-to-date inflation should also be below four percent before the reserve standard is reduced anew. “[T]he BSP needs the benefit of time and more observations. The BSP will be in a more strategic position to, one: ascertain the impact of the previous move to reduce RRR (reserve requirement ratio) and the subsequent tightening it had to implement in the face of potential second-round effects and disanchoring of inflation expectations and, two: chart the future path of monetary policy,” he added.

Monetary authorities slashed the RRR in two moves last year, which they described as “procedural” tweaks to reduce the cost of borrowing money in the financial system. Some bank analysts are betting that reserve cuts will come prior to any tweaks to the key policy rate.

In a joint statement on Tuesday, state economic managers noted that slowing headline inflation “was widely felt across all regions.”

“In particular, inflation in Metro Manila and other areas slowed to 4.6% and 4.4%, respectively. Inflation in the Autonomous Region in Muslim Mindanao was the highest at 6.1%,” the statement read.

“We also note that the price index of petroleum and fuels for transport equipment significantly dropped by 1.8% last month from 4.1% in December 2018. This partly contributed to lower transport cost and utility rates that further drove down inflation of non-food items.”

In a separate statement, the BSP said the latest inflation data were “in line with a target-consistent inflation path” as overall price increases are expected to slow further in 2019 and 2020.

“Domestic supply-side pressures are seen to further ease, while the impact of BSP monetary policy adjustments in 2018 is expected to continue to work their way through the economy,” the statement read.

The BSP sees full-year 2019 and 2020 headline inflation to average 3.2% and three percent, respectively, slower compared to the 5.2% finish in 2018 and crawling back to the 2-4% target band.

ANZ Research analysts Khoon Goh and Mustafa Arif said in a report that “[t]he moderation in core inflation suggests that underlying pressures are easing.”

“January data supports the [BSP’s] view that inflation is likely to glide lower in the coming months,” they said.

“As such, we expect the BSP to keep rates unchanged at its meeting on Thursday.”

Michael L. Ricafort, economist at the Rizal Commercial Banking Corp., shared this expectation, saying: “The latest inflation data would, at the very least, likely keep key local policy rates unchanged on the next monetary policy meeting on Thursday…”

“For the coming months of 2019, any sustained easing inflation trend, at some point, may eventually lead to [the] easing of local monetary policy,” Mr. Ricafort said.

“Banks’ reserve requirement ratio (from the current 18%) and/or local policy rate (from the current 4.75%) may be cut as soon as inflation goes back to the 2-4% target range, which may happen as early as [the second quarter of 2019].”

ING’s Mr. Mapa said another RRR cut could happen soon, with policy rate cuts “also a possibility” by May as economic growth would continue to display the “knock-off effects of aggressive tightening.”

Inflation’s good news comes three months ahead of the May 13 mid-term elections, and Malacañang said it was “pleased” with the latest report.

“With inflation further tapering down to a 10-month low of 4.4%, this Administration will oversee and ensure that its consequent effects at the market would be felt by the ordinary consumer,” Presidential Spokesperson Salvador S. Panelo said in a statement.

He recalled that last year’s soaring prices “tested our will as a nation.”

“Not disheartened nor cowed, we rose to the challenge as a people. With the President’s strong and decisive action, we remained focused and steadfast as we addressed the conditions that contributed significantly to inflation.” — with A. L. Balinbin