By Lee C. Chipongian
Inflation rate is expected to stay within the central bank’s two percent to four percent target range next year mainly on the assumption that oil prices will slow down in 2019 and from the expected negative base effects from the supply side.
Bangko Sentral ng Pilipinas (BSP) Deputy Governor Diwa C. Guinigundo said that while they are reviewing and monitoring a lot of factors in tracking the inflation path, the oil price situation is a crucial assessment.
For 2019 though, after readjusting lower its 2018 and 2019 inflation forecast last week when the Monetary Board decided to increase policy rates for a second time in a row, the BSP is more confident inflation will keep below the four-percent level next year based on their own review and the projection of the International Monetary Fund and the US Energy Information Administration on oil prices.
“Why (is) 2019 inflation expected to decelerate: one, because we expected a decline in oil prices in 2019 — the basis of futures prices — as well as assessment of the different forecasts of the IMF, the US-EIA and other international institutions,” said Guinigundo in a press briefing.
“(The) world net oil import growth is also expected to decelerate,” he added. “And finally (we expect) negative base effects from January to August of 2019 due to supply shocks on oil, food and excise tax in January to August of 2018.”
The IMF oil price assumption for 2018 is an average of $62.31 per barrel and $58.24 per barrel for next year. The IMF’s World Economic Outlook report said oil price assumptions “will remain unchanged in real terms for the medium term.” The EIA has a Brent oil price forecast of $71 per barrel this year and $66 per barrel for 2019.
After raising key overnight rates by another 25 basis points on June 20, the BSP forecasts 2019 inflation of 3.3 percent, lower than its previous projection of 3.4 percent and within the government target.
This year’s average inflation is also expected to be lower than previously assumed, at 4.5 percent from the May 10 estimate of 4.6 percent, but still exceeding the target.
Guinigundo reiterated that based on the monthly path of inflation, the peak for 2018 is still in the third quarter, or July to September.
“This is much earlier compared to the previous projection (May 10) of the Monetary Board and I think due to the fact that the momentum of the inflation appears to be slowing down. If you take a look at the month-on-month, there’s a very definitive trend towards a slowing down of inflation.”
The peak projection would still depend on oil prices, he said. “Oil prices is a very important and very critical assumption in the projection of the BSP. We should also bear in mind that there are also possible mitigants of inflation down the road if Congress is able to pass the rice tariffication bill.”
Based on the BSP’s estimate, a quarterly decline in inflation of about 0.2 percentage point could be achieved if the bill is approved this year. The bill amends Republic Act No. 8178 or the Agricultural Tariffication Act of 1996, replacing the quantitative restrictions on rice imports with tariff.
In the meantime, Guinigundo said they have let go of a 2018 within- target inflation as factors that point to it remaining elevated persists.
“Inflation is expected to be elevated because for one, (it’s the) sustained robustness in economic activity for the second quarter up to the end of 2018, and second, the Monetary Board noted the positive base effects from June to August 2018 because of the difference in the oil price assumptions as well as on actual numbers of oil prices. In June 2017, oil prices averaged only at $46.47 per barrel,” he explained.
Lastly, the minimum wage is expected to be implemented by October this year on top of actual approvals by the wage boards of P5 to P30 on average. Guinigundo added that the excise tax on tobacco which was expected to be implemented next month as scheduled, will further impact on inflation.