FROM its current 6-percent level, the country’s consumer price growth is now expected to decelerate to below 4 percent as early as March next year, prompting the Bangko Sentral ng Pilipinas (BSP) to halt its tightening moves in Thursday’s meeting.
In a press briefing following the Central Bank’s last policy setting meeting of the year, the Monetary Board announced its decision to keep the overnight reverse repurchase (RRP) facility rate unchanged at 4.75 percent.
The interest rates on the overnight lending and deposit facilities were likewise held steady.
“In deciding to maintain the BSP’s monetary policy settings, the Monetary Board noted that the latest inflation forecasts show a lower path over the policy horizon, with inflation settling within the target band of 2 to 4 percentage points for 2019 to 2020,” BSP Assistant Governor Francisco G. Dakila Jr. said. Dakila read BSP Governor Nestor A. Espenilla Jr.’s monetary policy statement.
The assistant governor said they expect inflation to fall below 4 percent “around the end of the first quarter of 2019.”
This is a significant development from their earlier statements that they expect inflation to remain above 4 percent in the first half of 2019 before falling to below 4 percent in the second half of next year.
In particular, inflation is now expected to average 3.18 percent for 2019, lower than the November forecast of 3.5 percent.
Both the 2018 and 2020 forecasts were slashed, too, with this year’s inflation seen to hit 5.2 percent, revised from the 5.3 percent forecast in November; while 2020’s inflation is projected to hit 3.04 percent, down from the 3.3 percent November forecast.
“Recent headline inflation readings indicate signs of receding price pressures as constraints on food supply continue to ease with the implementation of various nonmonetary measures.
Inflation expectations have also steadied given the decline in international crude oil prices and the stabilization of the peso,” Dakila said.
Earlier this year, President Duterte issued Administrative Order 13 to remove nontariff barriers and streamline administrative procedures on the importation of agricultural barriers to ease food inflation.
Peso trade
MEANWHILE, data from the Bankers Association of the Philippines showed the local currency closing at 52.62 to dollar on Thursday. This is 9.5 centavos stronger than the previous day’s trade. It is also stronger than the 52.808 to a dollar November average trade of the peso.
Dakila also said their baseline outlook for oil is now at around $63 per barrel for 2019, in stark contrast to the above $80 per barrel in the third quarter of 2018.
BSP Director for the Department of Economic Research Dennis Lapid said the slash in all three inflation projections were “consistent with the notion that supply shocks are not a permanent influence on inflation.”
“This is consistent with our past experience with previous supply shock episodes where we would have a very sharp increase in inflation and then a few months later you would see a steady deceleration,” Lapid said.
Dakila said the risks to the inflation outlook have become more evenly balanced for 2019 and lean toward the downside for 2020 amid a more uncertain global economic environment.
Tightening cycle over?
DAKILA said the BSP is now “more comfortable” in their ability to bring inflation back to target range for 2019.
The BSP pegs their inflation target range at 2 to 4 percent on average annually for 2018 through 2020.
“There is now an ample cushion given that we are looking at different oil price scenarios; and actually, even if oil prices are to rise significantly compared to where they are today, we are still anticipating that inflation will be within target for next year,” Dakila said.
The BSP pulled out a total 175-basis-point hike in the year starting May to pull down inflation.
Asked if the BSP was done hiking rates, Dakila said the future decisions of the Monetary Board will continue to be data-dependent, but said they remain ready to take action if necessary.
“The Monetary Board deemed it prudent for the time being to keep monetary policy settings steady and allow previous monetary responses to continue to work their way through the economy.
The Monetary Board emphasizes that it remains vigilant against developments that could affect the outlook for inflation and financial stability,” Dakila said.
“The BSP is prepared to take further policy action as appropriate to safeguard its price stability mandate,” he added.
ING Bank economist Nicholas Mapa said the lower inflation forecasts increase the likelihood that the BSP may be done with its recent tightening cycle.
“The BSP will likely slash reserve requirement ratios as early as 1Q with inflation decelerating while domestic liquidity conditions remains tight [latest M3 growth at 8.2 percent],” Mapa said.
“Meanwhile, should inflation edge closer to within target, growth decelerate until the first half of 2019 and the Fed indeed take on a more dovish stance next year, the BSP may quickly slash its main policy rate as early as the second quarter,” he added.
Inflation in November is at 6 percent. While still above the 2 to 4 percent target, it is a “significant deceleration” from the 6.7 percent peak in the previous month.
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