By Cai U. Ordinario & Bianca Cuaresma
Upside risks to inflation were top of mind among the economic managers on Friday, when the rate of change in prices edged still closer to zero in August to 0.6 percent from 0.8 percent in July.
This development prompted the Bangko Sentral ng Pilipinas (BSP) to drop yet again broad hints of an interest-rate adjustment sooner than some economists and observers anticipated, as year-to-date inflation averaged 1.7 percent or even lower than the 2-percent floor of the year’s target range.
“We will make adjustments to policy, if needed, to ensure just enough liquidity in the market so the favorable inflation path is sustained,” BSP Governor Amando M. Tetangco Jr. told financial journalists.
“We will continue to monitor developments in global oil prices, track El Niño, as well as coordinate with relevant agencies of government on mitigants to El Niño’s adverse impact. We are also mindful of global developments and their effects on domestic liquidity,” he quickly added.
Tetangco’s comments highlighted a barely perceptible shift in tone that, for economists and observers, represent forward guidance on monetary policy down the line.
“I think the governor struck a rather hawkish tone, hinting that he looks to get a hold of liquidity in the system,” Nicholas Antonio Mapa, research officer at the Bank of the Philippine Islands, said quickly in reaction.
At the National Economic and Development Authority (Neda), Economic Planning Secretary Arsenio M. Balisacan gave ample warning the El Niño weather disturbances could cause a significant increase in commodity prices toward year-end up to next year.
The Philippine Statistics Authority reported on Friday that inflation hit an all-time low of 0.6 percent in August 2015 from 0.8 percent in the previous month. Inflation a year earlier averaged 4.9 percent. Balisacan said the El Niño, likely extending to 2016, could ramp up prices anew.
“We need to reinforce our El Niño preparations to ensure food security. The strong collaboration of the national government, local government units and the private sector is essential to the success of efforts to mitigate the effects of El Niño,” Balisacan said.
The Neda is now spearheading task force El Niño and has started drafting a road map to address the impact of El Niño or RAIN.
“The careful use of the phrase ‘just enough’ belies his hawkish tone, as in the past he’s generally been accustomed to use words such as ‘ample,’ but his choice may show that he feels he needs to get a better hold of the bevy of liquidity in the system,” Mapa said of Tetangco, pointing out that the pace of expansion in liquidity has slowed to only 8.6 percent in July and considered quite “healthy” in absolute peso terms.
Mapa reiterated Tetangco’s comments hinted strongly of a shift in policy over the near term and likely to become more emphatic going forward.
“[The] Governor has been known to carefully plan and telegraph his moves well in advance, and this may be the first salvo in his message to the market,” Mapa said.
He also said a tightening makes sense, since this was in line with the anticipated US Federal rate hike, preparations for the implementation of a so-called interest-rate corridor next year, as well as a preemptive move against forecast higher inflation in the coming months as El Niño intensifies and as so-called base effects wane.
In August the Neda said downward price pressures in food, energy and oil rates helped limit inflation to no more than 0.6 percent, representing an all-time low.
At the national level, the housing, water, electricity, gas and other fuels index declined by 1.7 percent, while the transport index recorded a decline of 0.6 percent in August.
Apart from cheaper fuel and utility prices, food prices also slowed in August. Data showed that the food index alone slowed to 1.1 percent in August from 8.7 percent last year.