Headline inflation in the Philippines may hit 1.9 percent on average this year, or below the desired range of 2 percent to 4 percent set by the central bank for full-year 2015, the Singapore-based DBS Bank said in a research note.
The rate has been on a decline, easing from 4.9 percent in July 2014 gradually down to a record low of 0.8 percent in July this year, despite robust economic growth of more than 6 percent during the period.
The “Bangko Sentral ng Pilipinas (BSP) has been consistent in maintaining a tight policy bias since last year. However, it is looking likely now that the BSP may miss its inflation target,” DBS said.
The downside to having an excessively low inflation is that if prolonged, it could promote ‘stagflation’ (or stagnation in prices) and eventually lead to deflation.
BSP confident of target
The BSP, however, remains confident that inflation this year would average between 2 percent and 4 percent despite the continued downward trend in consumer prices.
BSP Governor Amando Tetangco Jr. said earlier this month: “We expect some monthly outturns below our target range, but we remain confident that the full-year averages over the policy horizon will be kept within the target range, albeit close to the lower end.”
Even core inflation weak
DBS took note of the fact that inflation in the Philippines is not only driven by low oil prices, because even core inflation, which excludes food and energy prices, slipped to 1.9 percent in July, the first time the rate fell below 2 percent since August 2013.
“One possible reason for the sustained fall in inflation numbers is currency strength,” it said, referring to the peso’s firmness compared with the other currencies in the region due to strong dollar remittances from its overseas Filipino workers (OFWs).
Since the end of 2013, the peso has been the best performing Asian currency against the dollar and this has kept imported inflation low, DBS said.
“Strong foreign remittance flows have been supporting the peso amid the recent bout of financial market volatilities,” the bank said in the research note.
No GDP worries
DBS does not see risk to growth in the overall economy or the foreign exchange rate.
“With GDP [gross domestic product]growth still looking fairly strong, the BSP is not under any kind of pressure to tweak its policy right now,” the bank said.
One may expect the central bank to be more tolerant of a weaker peso going forward, though, particularly given how the peso has moved in the past 18 months or so, it added.
Earlier, the BSP said its policy settings are still appropriately calibrated, adding that it “can continue to allow the foreign exchange rate to respond to market conditions but with scope to rein in excessive volatilities.”
The Philippine peso continued to lose strength against the US dollar in this week’s trade to remain at its softest level in five years. It lost 15 centavos to close at P46.50 to $1 on Thursday, its weakest since July 7, 2010, when it traded at P46.55.
Financial markets in the Philippines were closed on Friday for a national holiday.