BSP unlikely to ease policy rates – analysts

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Analysts from two banking giants said the central bank is not likely to ease its key policy rates anytime this year despite the record low inflation rate as low food prices and oil prices are bound to be offset by the impact of the El Nino phenomenon.

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Philippine headline inflation posted its sharpest drop in two decades in June at 1.2 percent on the back of sufficient food supply and moderate price pressures on energy and oil rates.

UK-based investment bank Barclays and Singaporean bank DBS said El Nino continues to provide an upside risk for consumer prices.

Barclays said while near-term inflationary pressures have eased significantly, there are signs that drier-than-normal weather conditions are affecting agricultural output, with rice planting in some areas seeing delays.

“Given the risk of El Niño to food prices this year, and with growth likely to recover strongly from the second quarter, we continue to think it is unlikely the BSP will join other central banks in easing monetary policy,” Barclays said.

Barclays said it sees the next policy move being a rate increase, most likely in the fourth quarter of 2015, after the Fed begins tightening its own policy rates.

DBS, meanwhile notes that food makes up about 40 percent of the consumer price index, and thus it sees risk to inflation stemming from El Nino. It said that with its onset, inflationary expectations may rise alongside higher food prices.

However, it added that the central bank has no reason to worry “given that current inflation is near the floor of the central bank’s target … Steady rates should remain for the rest of this year.”

Peso as another risk
DBS said that besides El Nino, the peso may also push inflation upward. A possible weakening of the peso may mean an upward core inflation trend going forward, it said.

Core inflation, which excludes food and energy prices, dipped further to 2 percent in June from 2.52 percent in May and from 2.8 percent recorded a year earlier.

On the other hand, a strong peso could be the main reason why core inflation continued to ease in June. .

“Bulk of this easing in core inflation has more to do with a relatively strong peso and not so much because of a softening demand. As far as growth is concerned, private consumption growth continues to lead overall GDP [gross domestic product]growth and we see few reasons why this would change,” it explained.

The bank noted that the peso has been relatively resilient in the past 18 months and the best performing unit in Asia, against the US dollars.

A resilient peso has kept imported inflation low and likely to be the key reason to explain the downward trend in core inflation, it concluded.

As of Tuesday’s trade on the Philippine Dealing System, however, the peso closed at its weakest level in over a week as global markets took positions in the dollar ahead the
European Union emergency summit that will tackle the latest developments in Greece’s debt crisis.

The Philippine unit ended at P45.17 to $1, losing 7 centavos from Monday’s P45.10.

Tuesday’s close was the poorest for the peso against the dollar in over a week since it settled at P45.19 on June 29.

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