Slower-than-expected March inflation seen making case for cut in policy interest rates

THE slower-than-expected March inflation rate bolsters the case for cuts in policy interest rates this year, bank economists said in separate analyses, with the adjustments expected as early as next month.

March inflation eased further to 3.3%, a sharper slowdown than what market players expected. This is the slowest pace since January 2018, and marks the fifth straight month of decline since November.

On Friday last week, the Philippine Statistics Authority attributed the inflation rate decline to a slower increase in the food and drinks index, which eased to 3.4% from 4.7% the previous month as supply improved.

The National Economic and Development Authority also said that the shift to a tariff system for rice imports from the previous quantitative restrictions helped bring down prices of the staple.

At the same time, officials of the Bangko Sentral ng Pilipinas (BSP) on Friday cautioned against swift plans to cut policy rates, saying that they need to be watchful about the El Niño episode as well as rising global oil prices which could affect price dynamics.

BSP Governor Benjamin E. Diokno said the slower-than-expected 3.3% inflation rate last month is “certainly good news,” even as he noted the need to keep a close watch on price developments.

Deputy Governor Diwa C. Guinigundo said that monetary authorities first need to see a “clear disinflationary trend” before touching key interest rates.

March inflation pulled the three-month average to 3.8%, well within the central bank’s 2-4% target band for 2019 and on track to hit its full-year forecast of three percent.

Bank economists are taking the latest inflation print as a green light for interest rate cuts.

“[T]he central bank’s repeated lowering of its 2019 inflation forecast suggests to us that monetary policy is likely to make a U-turn this year. In our view, another benign inflation print in April should allow the BSP to cut its overnight reverse repurchase rate by 25bps at its May meeting,” ANZ Research said in a market commentary released late Friday, adding that it expects an even lower 2019 average rate at 2.9%, from last year’s 5.2%.

“Assuming that the inflationary impact of the El Niño is mild, we see headline inflation around the mid-point of the BSP’s target in the coming months.”

The bank is holding on to its forecast of a total of 75bp cuts to benchmark rates this year, which will undo part of the cumulative 175bp rate increases which the central bank fired off in 2018.

For Michael L. Ricafort, Rizal Commercial Banking Corp. economist, inflation’s steady decline “may already prompt an easing in local monetary policy” as early as the May 9 monetary policy review — the third for 2019. He said such a move will remain prudent and will mirror trends abroad amid a muted global growth outlook.

Another economist cited the need to also reduce banks’ 18% reserve requirement ratio (RRR).

“With the delayed passage of the national budget plus tapering inflation, consumer spending will be the main driver of the economy for the first half,” said Robert Dan J. Roces, chief economist at Security Bank Corp.

“However, domestic liquidity is still a challenge, thus an RRR cut will need to happen soon — BSP will consider timing the cuts once inflation is fully settled within its target range.”

Mr. Diokno has said that he sees room to ease policy rates and to reduce the RRR, but clarified that monetary authorities will need more data to get the timing right for these moves.

In 2018, the BSP slashed the reserve standard in two moves of 100bps each, but had to pause to focus on surging commodity prices. — Melissa Luz T. Lopez