April inflation remains steady at 1.1%

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INFLATION in April remained flat at 1.1 percent, the same rate posted in March, on lower utility rates and fuel prices, which an analyst suggested would allow the central bank to ease policy rates in preparation for the implementation of its interest rate corridor (IRC) system.

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Data released by the Philippine Statistics Authority (PSA) on Thursday showed that April inflation was half the 2.2 percent recorded in the same month a year earlier.

The April figure fell below the 1.3 percent estimate by the Department of Finance but was within the 0.7 percent to 1.5 percent range estimated by the Bangko Sentral ng Pilipinas (BSP) for the month, and stood at the lower end of the projected range of 1.1 percent to 1.7 percent by analysts polled by The Manila Times.

The PSA said mixed movements in the annual growths were observed among the commodity groups.

Higher annual gains were noted in the indices of alcoholic beverages and tobacco; clothing and footwear; health; recreation and culture; and restaurant and miscellaneous goods and services.

On the other hand, the index for housing, water, electricity, gas, and other fuels continued to register an annual decline.

Growths for the rest of the commodity groups remained at their previous month’s rates. Core inflation, which excludes food and energy prices, also remained unchanged from March at 1.5 percent. Core inflation stood at 2.5 percent in April 2015.

Inflation in the first four months of 2016 averaged 1.1 percent, below the 2 percent to 4 percent target of the BSP for this year.

Supports demand prospects

The National Economic and Development Authority (NEDA) in a statement said flat April inflation supports favorable demand prospects, and is broadly in line with the expectation of brisker operations during the election period and an anticipated pick-up in economic activity during the summer season.

“Price movements for major commodity groups remained unchanged, while the slight price increases in some commodities were offset by downward price adjustments in others,” said Socioeconomic Planning Secretary Emmanuel Esguerra.

Prices of commodities in the food subgroup have been on a decline since January 2016, though a slight uptick in April was observed relative to the previous month.

“Worth noting is the monthly downward trajectory in the prices of rice, which was partly due to the timely arrival of additional rice imports. This ensured sufficient supply during the start of the year,” said Esguerra, who is also NEDA director general.

Inflation in the non-food subgroup inched up by only 0.1 percent despite upward price movements in several commodities.

“This is largely due to the stable prices of housing, water, electricity, gas and other fuels. The decline in electricity, gas and other fuels, as well as in the actual rentals for housing offset the upward price adjustment in water supply and miscellaneous services relating to the dwelling,” he said.

Easing of policy rates seen

A Bank of the Philippine Islands (BPI) economist said with April inflation continued to hover well-below BSP’s inflation target with year-to-date inflation at 1.1 percent, he expects monetary authorities to ease policy rates.

“With inflation benign, some central banks surprising with dovish tones, and Tetangco committed to tightening his interest rate corridor prior to the implementation of the IRC, we do expect the BSP to enact its “one-time operational” adjustment to its corridor by cutting both the repurchase (6.0 percent to 4.5 percent) and reverse repurchase (4.0 percent to 3.5 percent)” BPI associate economist Nicholas Mapa said.

Mapa said the adjustment has been long-telegraphed since November 2015 and will need to be implemented before June.

“Governor Amando Tetangco Jr. has long been espousing tightening his corridor to enhance efficacy of the soon to be implemented IRC and term deposit facility framework,” he pointed out.

The BPI economist stressed that benign inflation trends will give the Governor the window to enact an effective easing move, prior to the Fed rate hike.

“To be sure, Tetangco has also been assuring the market that such a move is ‘policy neutral’ and that it is not in line with BSP’s current appropriate stance. Cuts are coming,” he said.

For its part, however, the central bank sees no urgent need to change its policy settings, despite the flat April inflation rate.

BSP Governor Amando Tetengco Jr. said the unchanged April inflation rate continues to support the central bank’s view that inflation should be manageable and likely inch to within target over the policy horizon.

“We will continue to monitor developments especially movements in international commodity prices,” Tetangco said in a text message to reporters.

The BSP chief said monetary authorities are also mindful of financial market volatility that could result from market reactions to advanced economies monetary policy.

“Right now we still do not see any strong need to change policy settings,” he stressed.

Upside risk

NEDA’s Esguerra warned, however, of the upside risks over the medium-term because of a potential recovery in oil prices, El Niño, and the possible occurrence of La Niña in the latter part of 2016.

“International oil prices remained below 2015 levels and this is projected to become unstable on the back of a potential oil production freeze over the medium term by Russia and selected members of the Organization of the Petroleum Exporting Countries,” he said.

On the domestic front, Esguerra stressed that with the El Niño phenomenon likely to last until July 2016, appropriate timing of rice importation remains critical to avoid supply disruptions that could result in unstable rice prices.

On the other hand, he noted that further intensification of La Niña in the second half of the year could provide upside pressures on the prices of agricultural commodities and utilities.

“To help mitigate the impact of El Niño and prepare for the highly likely occurrence of La Niña, government agencies should coordinate and study various response measures to the possible effects on agricultural production,” said Esguerra.

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