May inflation uptick is one-off; rate cuts still ‘inevitable’ – Diokno

By Lee C. Chipongian

Bangko Sentral ng Pilipinas (BSP) Governor Benjamin E. Diokno brushed off the uptick in the May inflation of 3.2 percent and he reiterated that reducing interest rates is only a matter of timing.

Bangko Sentral ng Pilipinas Governor Benjamin E. Diokno. (Bloomberg photo) Bangko Sentral ng Pilipinas Governor Benjamin E. Diokno. (Bloomberg photo)

“The 3.2 percent inflation rate in May, coming after six months of progressive decline, cannot be seen as a reversal of the trend. One data point does not constitute a trend. That’s elementary,” Diokno commented after the government released on Wednesday the latest consumer price index which was higher than April’s three percent.

He said on Tuesday that he expects the inflation average to go down to the two percent level in the third quarter, the low end of the BSP’s two-four percent inflation target for this year.

“With world oil prices easing, we expect the annual inflation rate to be in the vicinity of three percent in 2019 and 2020,” said Diokno. As of May 9, the BSP forecasts a 2019 inflation average of 2.9 percent and 3.1 percent for 2020.

In the meantime, the 3.2 percent inflation rate in May is within the BSP’s forecasts of 2.8 percent to 3.6 percent for the month.

BSP Deputy Governor Diwa C. Guinigundo said that despite the “one-month price gain” the year-to-date inflation remains within the two-four percent inflation target and that the triggers for the increase in May prices are just temporary.

"Two major factors were behind this acceleration of inflation for May. One is higher food inflation particularly fish, fruits and vegetables due to the continuing dry conditions. And two, utilities including housing also contributed to the uptick. Basically, the drivers of inflation remain on the supply side and therefore generally temporary,” explained Guinigundo.

The BSP is closely watching risks to inflation, he added. “The only risk is when the uptick gets prolonged and starts generating second round effects and higher inflationary expectations especially in the face of the heavy catch up on public spending on infrastructure in the second half,” he said.

Diokno reiterated that the inflation path remains on a decelerating path, so is their signal that there is room for future policy rate cuts.

“In economics, initial conditions matter. Everyone knows that the 175 basis points increase last year was temporary — a measure to arrest rising inflation and to manage inflation expectation. Now that inflation is moderating and going back to normal, it is irrational to think that the high policy rate will remain. The correct view is that policy rates cut is inevitable, though the exact timing will be data-dependent and evidenced-based,” the BSP chief said.

Last May 9, during the Monetary Board’s third policy rate meeting for the year, the central bank eased benchmark interest rates by 25 basis points since inflation is decidedly on a downtrend.

The BSP policy normalization started on the day that the government reported lower GDP growth of 5.9 percent for the first quarter.

Diokno has noted the impact of the budget impasse – delayed by four months – to the GDP growth and that the problem was government spending during the quarter and not consumption growth.

The Monetary Board also continues to assess that the risks to inflation outlook remain broadly balanced for the next two years even with risks of a prolonged El Niño dry-warm weather and rising global oil prices.

HSBC economist Noelan Arbis said inflation would likely cool in the second half, giving the central bank scope to further cut its benchmark rate and banks’ required reserves to support slowing growth.

Major central banks around the world have started to cut rates while the US Federal Reserve has also hinted at the possibility of an interest rate cut in the face of rising risks to trade and global growth.

The BSP, which would next meet on June 20 to review monetary policy, started to unwind last year’s tightening with a 25 basis point cut in its main rate last month to boost economic growth.