Inflation hits new low, policy rates seen steady

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Headline inflation eased to a new all-time low of 0.4 percent last month, bolstering expectations that policy rates would remain unchanged for the rest of the year.

September’s result, down from August’s 0.6 percent, came as prices continued to ease in the housing, utilities, gas and transport sectors, the Philippine Statistics Authority (PSA) reported on Tuesday.

It fell within the Bangko Sentral ng Pilipinas’ (BSP) outlook of 0.2 percent to 1 percent for the month and was at the lower end of the 0.4 percent to 0.8 percent forecast range in a Manila Times poll of analysts.

Core inflation, which excludes food and energy prices, slipped to 1.4 percent from 1.6 percent,


Year to date, the rise in consumer prices averaged 1.6 percent, below the central bank target of 2 percent to 4 percent. From January to September, core inflation averaged 2.1 percent.

“The downtrend was primarily due to the annual declines in the indices of housing, water, electricity, gas and other fuels and transport,” the PSA said of the September inflation result.

Slower annual increases were also seen in all other commodity groups except communication, recreation and culture, education and restaurant and miscellaneous goods and services, it added.

Bottoming out
“Based on our latest forecasts, we should see inflation bottoming out on account of the impact of El Nino and weak peso,” central bank Deputy Governor Diwa Guinigundo said in a text message to reporters.

With supply conditions generally favorable and demand still manageable, the rise in consumer prices is expected to stay in line with the BSP’s forecasts of 1.6 percent for 2015, 2.6 percent for 2016, and 3 percent for 2017, he added.

“On this basis, the MB’s [Monetary Board] recent decision to keep monetary policy steady remains appropriate. Any development in the US Fed and China should be addressed by our preemptive moves last year which gave us the monetary space today,” Guinigundo pointed out.

Central bank Governor Amando Tetangco Jr. has said the key overnight borrowing rate of 4 percent could be kept at that level for the rest of the year given benign inflation.

Easing unlikely
Analysts said the record-low inflation was unlikely to prod the BSP into adjusting policy rates.

“Lower inflation will not necessarily lead BSP to ease policy conditions,” said Rahul Bajoria, economist at United Kingdom-based investment bank Barclays.

The central bank, he said, appears largely comfortable with its policy stance.

“We believe BSP is watching liquidity conditions more closely, and it is likely to inject liquidity, possibly by easing banks’ reserve requirement ratio, if conditions were to deteriorate,” he added.

Sharing the same view was Singaporean bank DBS, which said a BSP rate cut does not look imminent.

“Not as long as GDP [gross domestic product]growth momentum remains fairly strong, which is currently the case. The fact that some inflationary risks on food prices persist means that BSP is also likely to keep its tight policy stance,” DBS said.

Still, Barclays noted that with the US Fed unlikely to tightening monetary policy, the BSP would be under pressure to cut rates at some time.

“This is especially true if the central bank would want to facilitate a softer peso ahead. We no longer expect any rate hike from the BSP in the next year. Risks are now tilted towards a cut,” it said.

Upside risks
The National Economic and Development Authority (NEDA) said the current low inflation environment would persist for the rest of the year as oil prices were not expected to rise significantly.

Socioconomic Planning Secretary Arsenio Balisacan, however, warned that the government should remain wary of upside risks such as the ongoing El Niño episode.
“Government must ensure that food supply is sufficient by improving the level of inventories and efficiency of the distribution system,” Balisacan said in a statement.

“Continued monitoring of drought occurrence in agricultural areas is necessary to ensure timely policy actions, including importation of rice and other basic commodities to augment domestic supply,” he added.

As the El Nino intensifies, the NEDA chief said the government could consider increasing the number of agricultural workers as beneficiaries of the Pantawid Pamilyang Pilipino Program.

Access to finance for the agriculture and fisheries sectors should also remain unhampered, Balisacan said.

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