Higher inflation, possible rate cuts projected in 2020
Credit to Author: Mayvelin U. Caraballo, TMT| Date: Tue, 07 Jan 2020 16:29:16 +0000
THE country’s headline inflation could continue to pick up this year after averaging 2.5 percent in 2019, but monetary authorities still have room to ease policy rates as early as February, analysts said on Tuesday.
ING Bank Manila senior economist Nicholas Antonio Mapa expects inflation to accelerate in 2020 because of “reverse” base effects amid the implementation of the third tranche of the fuel excise tax at the start of the year.
“Factoring the reverse base effects, we expect inflation to average 3.2 percent and hit as high as 3.4 percent, should oil prices edge higher due to possible supply-side disruptions,” he said.
Mapa also believes the recent escalation in tensions between the United States and Iran over the assassination of one of the Islamic Republic’s top generals may exert additional inflationary pressure on the headline print, with global crude oil prices rising at a time when excise taxes are levied on fuel products this month.
Despite these developments, the economist said Bangko Sentral ng Pilipinas (BSP) Governor Benjamin Diokno was quick to downplay a possible upside breach, although he did note that risks to the inflation outlook are on the “upside.”
“We continue to believe that the BSP will have the scope to ease monetary policy further in 2020 with the first rate cut slated for [its] February meeting,” he added.
For his part, ANZ Research’s chief economist Sanjay Mathur and economist Mustafa Arif said the recent hike in crude oil prices, if sustained, posed a increased upside risk to inflation.
They noted that local fuel prices increased 13 percent year-on-year, in line with the rise in global oil prices through December.
“More recently, geopolitical developments in the Middle East have pushed up Dubai Crude prices to $68.27 per barrel (as of publication). Further escalation poses a key upside risk to the inflation outlook in 2020,” the economists said.
Despite this, they said they were keeping “the view that the central bank has room to cut its policy rate as early as [the] first quarter [of] this year.”
On the other hand, Cheuk Wan Fan, HSBC Private Banking managing director and chief market strategist for Asia, projected headline inflation to remain stable at 2.9 percent in 2020.
“This will leave room for the BSP to cut policy rate further by 25 basis points in the first quarter and another 25 basis points in the second quarter of 2020, lowering the policy rate to 3.50 percent by end-2020,” she said.
Earlier, Diokno said the central bank was likely to cut interest rates by at least 50 basis points this year after implementing a combined 75-basis-point interest rate cut in May, August and September 2019.
This brought overnight borrowing, lending and deposit rates to 4 percent, 4.50 percent, and 3.50 percent, respectively.