By Lee C. Chipongian
Declining inflation, from 5.1 percent in December to 4.4 percent in January, would eventually lead to lower interest rates but the market still expects a Monetary Board pause or no-change when they meet this week to decide on policy rates.
Bangko Sentral ng Pilipinas (BSP) Deputy Governor Diwa C. Guinigundo said the declining inflation — an expected positive outcome in the BSP’s inflation management – gives the BSP “more space to review its current monetary policy.”
“With modest demand pressures, monetary policy could be slight on the brake,” said Guinigundo. The market would read this as possible inaction on Thursday, the Monetary Board’s first policy meeting for the year.
He has said last week that there will be no quick reversal in monetary policy, both in the policy rate or cuts in banks’ reserve requirement ratio (RRR), that they would need to see an inflation firmly settled within the two-four percent target before considering further actions. “(The) BSP needs the benefit of time and more observations,” he said.
With the low January inflation which was within the BSP’s forecast range of 4.3-5.1 percent for the month, but still above the two-four percent target, Guinigundo said the central bank is in a “more strategic position to one, ascertain the impact of the previous move to reduce RRR and the subsequent tightening it had to implement in the face of potential second round effects and disanchoring of inflation expectations and two, chart the future path of monetary policy.”
He said that for now, the BSP is “in an urgent mode” of validating and reassessing its previous forecasts of 3.2 percent average inflation for 2019 and a flat three percent for 2020, given the low January inflation. The 2019 and 2020 forecasts was announced last December 13 when the Monetary Board decided to leave rates unchanged after raising it by 175 basis points in five consecutive meetings. Based on rhetorics coming out of the BSP, another unchanged decision may be coming.
Guinigundo said further validation is required “in the larger context of current and expected liquidity and credit conditions, prospects of economic growth and the impending slowdown in the global economy.”
He stressed however, that the central bank is “ready to change course when warranted.”
The BSP official has said that inflation is expected to sustain its decline from January this year until December, and he sees “low and stable” inflation firmly at the midpoint level of the target or three percent by the third quarter this year.
As for the 4.4 percent January inflation, Guinigundo said this “clearly validates the lack of persistence of supply price pressures experienced for the most part of 2018 when oil prices surged by 60 percent with similarly sharp upturns in the prices of rice, meat, fish and vegetables.”
“Demand pressures are clearly receding given the sustained moderation in core inflation. The Government’s non-monetary measures to ensure ample supply of key food commodities turned the tide against food price upsurge,” he said.
The BSP’s monetary tightening in 2018 has effectively halted inflation from further rising after reaching its peak of 6.7 percent in September and October last year.
Guinigundo said both the BSP and the government worked to tame inflation and bring it back to the two-four percent target. “(The) government and the monetary authorities (prevented) the propagation of supply pressures into second round effects like higher wages and transport fares. Higher policy rates also helped keep inflation expectations anchored to the BSP’s forecasts and targets,” he said.
Guinigundo said previously that before considering any changes to its policy decisions, the inflation monthly reading should be within the target band and at the same time, the cumulative figure or the year-to-date against the previous year’s average should be firmly within the target.
The BSP issued a statement Tuesday on its mid-term inflation outlook, it said domestic supply-side pressures will continue to soften and the impact of the BSP’s 175 basis points rate hike will support growth as the adjustments “work their way through the economy.” But, concerns on volatility in the global oil market and its effect on inflation remains.