Makes room for BSP policy options – BSP, analysts
INFLATION slowed to a five-month low of 2.8 percent in June from 3.1 percent in May, creating what the central bank and private analysts view as room for monetary policy options.
The deceleration in the consumer price increases is also expected to continue during the rest of 2017, according to the government’s socio-economic planning body.
With prices of both food and non-food commodities easing, the headline inflation rate last month, however, still ran much faster than the 1.9 percent rate recorded in the same period in 2016, data released by the Philippine Statistics Authority Wednesday showed.Newly installed Bangko Sentral ng Pilipinas (BSP) Nestor Espenilla Jr. said the latest inflation rate was welcome news, though not unexpected, given that a further deceleration was in line with the BSP’s forecast.
“The lower inflation [rate]was partly driven by lower fuel prices and power rates. This validation gives us the space to carefully consider our policy options with respect to fine-tuning deployment of our monetary instruments to further the market-based development of the domestic financial market,” Espenilla said in a text message to reporters.
In a separate statement, the National Economic and Development Authority (NEDA) said slower price adjustments in both food and non-food commodities contributed to the easing of inflation last month.
For food and non-alcoholic beverages, inflation slowed to 3.5 percent in June from 3.8 percent the previous month. Also, non-food inflation slowed to 2 percent in June 2017 from 2.5 percent in May.
This follows the significantly slower year-on-year increase in domestic petrol prices during the period, particularly unleaded gasoline (5.1 percent from 9.9 percent), diesel (5.3 percent from 13.6 percent), and kerosene (3.0 percent from 9.6 percent).
Room for BSP policy options
Private analysts share the view of the BSP that the latest inflation print creates some room for the central bank’s monetary policy options.
The central bank has kept the policy rate unchanged since lowering the interest rate on overnight borrowing to 3 percent from 4 percent in the run-up to adopting an interest rate corridor system on June 3, 2016. The rate for overnight lending was kept steady at 3.5 percent and the deposit facilities at 2.5 percent, while the reserve requirement ratio was left unchanged at 20 percent.
Taking into account the deceleration in June inflation, Australia’’s ANZ Research cut its 2017 and 2018 inflation forecasts, as well as its policy rate call.
“We recently lowered our inflation forecast to 3 percent in 2017 and 3.3 percent in 2018 (from 3.2 percent and 3.5 percent respectively), well within the central bank’s 2 percent to 4 percent target range,” ANZ Research economist Eugenia Victorino said in a commentary.
With the downward revision to its inflation outlook, ANZ now expects the central bank to raise its key interest rate increase once by 25 basis points in the fourth quarter of 2017, with the next hikes not expected until the first quarter of 2018.
“Credit growth is still accelerating despite an easing momentum in economic activity. In the past, the central bank tended to respond by tightening macro prudential regulations,” Victorino said.
Land Bank of the Philippines market economist Guian Angelo Dumalagan said the lower-than-expected trend in headline inflation could give the Bangko Sentral more room to keep policy rates steady, despite the gradual tightening of US monetary policy.
“While soft inflation increases the chances of steady policy settings for the rest of the year, it does not preclude the possibility of a rate hike from the BSP, especially if inflation picks up unexpectedly or if the US Federal Reserve suddenly signals a faster pace of interest rate normalization,” Dumalagan said in an e-mail to The Manila Times.
Deceleration ‘to continue’
The NEDA said the moderate inflation rate recorded in the first six months of 2017 is expected to continue during the rest of the year.
NEDA Officer-in-Charge (OIC) and Undersecretary for Policy and Planning Rosemarie Edillon said keeping inflation stable strengthens the prospects of stronger domestic economic activity in the near term.
“The significant decline in the probability of extreme weather disturbances due to El Niño and La Niña until the end of 2017 bodes well for agricultural production and commodity prices moving forward,” Edillon said.
She added, however, that the government should take advantage of good weather conditions to accelerate implementation of the planned climate change adaptation measures.
“Among the crucial ones are investing in infrastructure, like catchment basins, advance atmospheric moisture extraction, and promoting water-saving technology. Rehabilitation of damaged irrigation systems and periodic maintenance will also ensure disaster and climate resiliency of the agriculture sector,” she said.
Despite having stable inflation levels, possible risks still have to be considered, Edillon said.
She also said, “domestic prices may be affected as global financial market conditions adjust in response to the faster monetary policy normalization in the United States.”
The NEDA official added that, domestically, the transitory impact of the proposed Comprehensive Tax Reform Program (CTRP) could push up inflation once implemented.
“We find it critical to have social safety nets to mitigate the short-run effects of the tax reform program.
Nevertheless, the government needs to communicate well to the public the CTRP’s benefits especially in terms of productivity improvements which, in effect, will eventually result in lower inflation,” she said.
Undersecretary Edillon serves as OIC of NEDA while Socioeconomic Planning Secretary Ernesto Pernia is on leave.
Lower yearly increases were recorded in the indices of the following commodity groups: Food and non-alcoholic beverages (3.5 percent); clothing and footwear (2.1 percent); housing, water, electricity, as and other fuels (2.1 percent); furnishing, household equipment and routine maintenance of the house (2.1 percent); health (2.4 percent); transport (2.3 percent); and recreation and culture (1.1 percent).
“Meanwhile, higher annual growths were observed in alcoholic beverages and tobacco index at 6.2 percent; health index, 2.3 percent; education index, 2.1 percent; and restaurant and miscellaneous goods and services index, 1.7 percent,” the statistical agency said in an accompanying statement.
Core inflation was also slower in June.
“Similarly, excluding selected food and energy items, core inflation continued to move at a slower pace of 2.6 percent in June 2017. It was recorded at 2.9 percent in May 2017 and 1.9 percent during the same month in the previous year,” it added.
For the first half of 2017, headline inflation settled at 3.1 percent and core inflation at 2.8 percent.
The BSP had forecast June inflation at between 2.4 percent and 3.2 percent, while analysts polled by The Manila Times had expected inflation for the month to stand between 2.8 percent and 3.2 percent.
Last month’s rate was the lowest print since inflation hit 2.7 percent in January this year.