August inflation seen below 1.5%; BSP rate cut expected

Published August 3, 2019, 12:00 AM

by manilabulletin_admin

By Lee C. Chipongian

Inflation rate could fall to below 1.5 percent in August which would likely convince the central bank’s Monetary Board to cut rates next week, according to analysts.

“We expect a renewed sharp fall in headline inflation to below two percent by August – and even below 1.5 percent, especially due to base effects – due to lower rice and other food prices,” said Metrobank affiliate, First Metro Pacific Corp. with research partner University of Asia and the Pacific.

The July inflation will be released on August 6, just in time for the Monetary Board to deliberate on in deciding if they will continue to pause or resume its rate reduction. Last May 9, the Bangko Sentral ng Pilipinas (BSP) benchmark rate was slashed by 25 basis points (bps).

ING Bank economist Nicholas Mapa said inflation will follow June’s downward path because of base effects. With improved supply side conditions, he said “benign inflation environment and well telegraphed communication from the BSP all helping anchor both inflation expectations and in turn, the actual inflation path.” He added that “prices as well as utility costs weighed on overall inflation while select food items such as fish, beef and vegetables and fruits still saw some price gains.”

Both FMIC-UA&P and ING expects the BSP to reduce policy rate beginning next week.

FMIC-UA&P said they expect a 50 bps cut in the second half of the year and another 200 bps reduction in reserve requirement ratio, releasing additional liquidity into the financial system. “We, thus, see the current peso strength as temporary, as the fundamentals remain negative in the second half,” it said.

FMIC-UA&P also noted that external sector account is still in deficits, the foreign exchange reserves still “need to increase further (and) US dollar weakness due to selling of US Treasuries by China and Russia for gold.”

ING’s Mapa, in the meantime, said that the BSP will cut rates next week with the “inflation path safeguarded in 2019 and 2020 all the while seeing growth momentum underperform its potential and fall below the 6-7 percent growth target for the year.”

“Meanwhile, seeing that RRR reductions carried out in May, June and July have not filtered through to the real economy just yet, we expect the BSP to monitor the impact of its initial round of RRR reductions before announcing additional cuts. The decision point to cut RRR further is dependent on whether the influx of liquidity is indeed channeled to increased lending and not simply returning to the BSP’s liquidity management facilities,” said Mapa.