INCREASED investment and consumer spending are expected in the second quarter with the taming of inflation and the acceleration of government spending, according to The Market Call published by the FMIC & UA&P Capital Markets Research.
“The expected ramp-up in infrastructure and other NG (national government) expenditures should facilitate a rebound in Q2. Softer upticks in prices of key commodities, likewise, will provide extra boost,” according to the report.
“We think that the downtrend in headline inflation and cuts in the BSP (Bangko Sentral ng Pilipinas) policy rates and RRR (reserve requirement ratio) will encourage higher investment and consumer spending starting Q2,” they said in the report.
The Philippine Statistics Authority (PSA) reported May inflation of 3.2%, up from 3% in April. BSP Governor Benjamin E. Diokno, however, said, that the central bank maintains its positive outlook on inflation for the year, which it expects to fall within the target band of 2-4%, with a projected rate of 2.9% for this year and 3.1% next year.
“The 3.2% inflation rate in May cannot be viewed as a reversal of the six months of progressive decline of inflation rates prior to the May number. One data point does not constitute a trend. That’s elementary. We are confident that the average inflation rate in the third quarter would be in the neighborhood of 2% because of base effects, declining world oil prices and the appreciating peso,” Mr. Diokno said in a mobile message to reporters.
Last month, the BSP decided to reduce its reverse repurchase (RRP) rate by 25 basis points (bps) to 4.5%. This was followed by a reduction in RRR by 100 bps on May 31, bringing down the rate to 17% from 18%.
Two 50-bps cuts are scheduled on June 28 and July 26, which will bring down the rate to 16%. RRR of thrift banks will also be reduced by 200 bps in three tranches with the same schedule with universal and commercial banks, while rural and cooperative banks’ reserve requirement were reduced by 100 bps to 4% from 5%, effective May 31.
According to the minutes of the Monetary Board meeting of May 9, released on Thursday, “Petitions for electricity rates and transport fare adjustments, the proposed increase in the excise taxes of alcohol beverages, and the potential impact of a prolonged El Niño episode are the main upside risks to inflation.”
“Meanwhile, slower global economic growth due to protectionist policies in advanced economies as well as geopolitical tensions and the potential renegotiation for lower tariff rates on meat products continue to be the main downside risks to inflation,” the BSP report added.
On the other hand, The Market Call report said that it is expecting inflation to dip below 3% as early as July and further slow to 2% in September, which is expected to boost consumer spending.
“Money growth should rally starting May after the BSP cut RRR and policy rates and adds to its GIR (gross international reserves) holdings to insulate the economy better from possible external shocks,” it said.
“Exports growth should move into positive territory by Q2 amidst the US economy’s upward march,” it added. — Reicelene Joy N. Ignacio