Inflation back on target, slows to 3.8%
Credit to Author: ANNA LEAH E. GONZALES| Date: Tue, 05 Mar 2019 16:25:48 +0000
Headline inflation finally returned to target in February, the government reported on Tuesday, slowing to 3.8 percent from 4.4 percent a month earlier.
The result, which fell within the Bangko Sentral ng Pilipinas’ (BSP) 3.7-4.5 percent projection and the 3.8-4.3 percent in a Manila Times poll of economists, ended an 11-month run of above-target outturns beginning March last year, when consumer price growth first breached the 2.0-4.0 percent goal and then steadily moved upwards, hitting a nine-year high of 6.7 percent in September and October.
Inflation has now eased for four straight months, raising the prospect of monetary policy adjustments. But with the year-to-date average still over target at 4.1 percent, a senior BSP official said it could be “premature” to reconsider the policy stance.
Last year’s surge had prompted monetary authorities to raise key interest five consecutive times — for a total of 175 basis points — before pausing in December and
February. The BSP’s policymaking Monetary Board will next meet on March 21.
Month on month and seasonally adjusted, inflation was unchanged at 0.1 percent in February compared to the previous month.
Core inflation, which strips out volatile food and energy items, was at 3.9 percent in February and 4.2 percent year to date.
“The main drivers in the downtrend of inflation in February 2019 were food and non-alcoholic beverages, alcoholic beverages and tobacco, and transport,” Philippine Statistics Authority (PSA) Deputy National Statistician Josie B. Perez said in a briefing.
A second round of fuel excise tax hikes had little effect on inflation, she added.
“Because of the slower rate of increases [in fuel] prices, there was no effect in February. Even if prices of gasoline increased, the increase last year was still higher,” the PSA official said.
Time for adjustments?
Commenting on the latest data, ING senior economist Nicholas Antonio Mapa said the BSP could consider cutting the reserve requirement ratio (RRR) and lower policy rates.
“With inflation back within target, this leaves the door wide open for newly appointed Governor [Benjamin] Diokno to think about easing off the brakes and look to help support the growth side of the equation,” he said.
“Ben Diokno, appointed late on Monday evening, has spent his career on the fiscal side of the fence and has indicated that the ‘role of the BSP is to ensure sustained inclusive growth’,” Mapa added.
HSBC Global Research, meanwhile, believes the BSP will more likely cut the reserve requirement ratio first before reducing policy rates.
“We expect monetary accommodation to first come in the form of RRR cuts. We forecast a 100 basis points cut to banks’ RRR in 2Q [second quarter] as inflation moves more firmly within the BSP’s 2-4 percent target range,” it said in a statement.
“Despite the downside surprise in February, prices still remain near the upper band of the BSP’s target. Indeed, core inflation came in higher than headline at 3.9 percent y-o-y, which suggests that underlying price pressures are still somewhat elevated,” HSBC added.
“We also expect RRR cuts to take precedent over any policy rate cuts. The effectiveness of interest rate cuts in stimulating growth are limited due to tight liquidity in the banking system and a rising loan-to-deposit ratio amidst the highest RRR in the region.”
HSBC noted that uncertainty also remained with regard to the direction of future US Federal Reserve rate hikes and pointed to lingering inflation risks from an El Niño.
“We expect 100 basis points of cuts to the RRR each quarter this year beginning in 2Q (totalling 300bp), cutting it down to 15 percent by the end of 2019,” it said.
Possible reduction ‘premature’
However, central bank Deputy Governor Diwa Guinigundo told reporters that “it may be premature to talk about a possible reduction in either the policy rate or the RRR at this time considering that the year to date inflation remains above the target of 2-4 percent.”
Nevertheless, Guinigundo said “these policy issues will remain on the table.”
“Timing is the crucial issue,” he added.
Guinigundo also noted that the latest inflation print was consistent with BSP’s forecast that inflation would average around 3 percent for 2019 and 2020, “highlighting the non-persistence of supply side pressures we managed in 2018 with the tightening moves of the BSP from May through November.”
He pointed out that monetary authorities continued to consider current policy settings as appropriate given emerging risks both here and abroad. More importantly, Guinigundo said the Bangko Sentral’s inflation forecasts for the next two years were anchored on the current policy rate of 4.75 percent.
“The Monetary Board will be meeting this month precisely to review the stance of monetary policy given the expected new data that would be available from now until the next meeting against the backdrop of a softening global economy,” he added.
In a separate statement, the central bank said “the latest inflation outturn further affirms the BSP’s projections that average inflation is expected to fall within the government’s 2-4 percent target range in 2019 and 2020, highlighting the abatement of supply-side pressures in 2018.”
“The BSP will continue to keep a close watch over possible emerging risks to the inflation outlook to ensure that the monetary policy stance remains appropriate,” it added.
Downward path to continue
Economic managers, for their part, welcomed the inflation slowdown and said they were optimistic that the downward path would continue for the rest of the year.
“This will be backed by the recent enactment of the Rice Industry Modernization Act (RA 11203), which is expected to bring down rice prices and cut inflation by 0.5 to 0.7 percentage point this year and 0.3 to 0.4 percentage point next year,” the chiefs of the Finance and Budget departments and the National Economic and Development Authority said in a joint statement.
They also said that the government would undertake proactive measures to lessen the impact of the El Niño weather phenomenon, which will likely affect 19 provinces in the country until June this year.
Authorities will remain watchful given rising oil prices, with the Land Transportation and Franchising Regulatory Board told to “increase its efforts to cover more of the targeted beneficiaries of the Pantawid Pasada Program in order to temper possible demand for transport fare hikes…”.
“Nevertheless, the economic team is upbeat that inflation is again starting to become manageable. While we constantly keep a close watch on the general prices of goods, we can now pay greater attention to programs that will further propel economic growth and help us reach our long-term development goals.”
Malacañang also welcomed the February result and reiterated the view that inflation would continued to ease.
“The Palace welcomes this positive development as proof that the macroeconomic policies of the Duterte administration have been effective in addressing soaring prices,” Palace spokesman Salvador Panelo said.
“We expect further improvement and disinflation as we continue to remain vigilant in monitoring the prices of basic goods used by ordinary Filipino consumers,” he added.
Initiatives implemented by the government to address above-target inflation included the issuance of Administrative Order 13, which removed non-tariff barriers and streamlined the importation of agricultural products; Memorandum Order 26, which directed the Trade and Agriculture departments to reduce the gap between farmgate and retail prices; Memorandum Order 27, which directed the Agriculture and Local Governments departments, along with the Philippine National Police and the Metro Manila Development Authority, to adopt measures to expedite the delivery of imported farm and fishery products to markets; and Memorandum Order 28 that directed the National Food Authority to immediately release rice stocks in its warehouses.
With a reports from Mayvelin U. Caraballo and Ralph Edwin U. Villanueva
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