By Lee C. Chipongian
The central bank will give the financial market some time to reassess inflation expectations after three cycles of reductions for both the policy rate and the reserves ratio in the last six months, according to the Bangko Sentral ng Pilipinas’s (BSP) highest-ranking official.
Bangko Sentral ng Pilipinas (BSP) Governor Benjamin E. Diokno. (Bloomberg)
“(It’s) too early to speculate. Let the market process what BSP has done this year,” BSP Governor Benjamin E. Diokno said Tuesday when asked if the Monetary Board will give verbal assurance to expect policy actions as early as the first quarter 2020.
The government just reported a 0.8 percent October inflation which was a three-year low or since April 2016’s 0.7 percent rate. It was also lower than September’s 0.9 percent and October 2018’s 6.7 percent.
The BSP had projected a range of 0.5 percent to 1.3 percent October inflation from 0.9 percent in September. It said actual inflation results were “tempered” by lower oil and rice prices despite higher electricity costs, as well as water, selected food items and LPG price hikes.
Central bank officials said inflation for 2019 has “likely bottomed out in October” and could “start to pick up slightly in the remaining months of 2019 as base effects start to dissipate.”
They also observed a more stable global crude oil prices after geopolitical tensions in the Middle East caused some volatility. Also, the “deepening trade tensions between China and the US along with other countries in the region have raised global economic uncertainty, which pose a downside risk to the inflation outlook,” the BSP said.
As a matter of policy in announcing the Monetary Board’s forward guidance the BSP will “always be data dependent and evidence based,” said Diokno.
The BSP has cut interest rates three times for a total 75 basis points (bps) this year. The first rates’ reduction was on May 9, followed by another on August 8 and the last one on September 26. As for reserves requirement ratio (RRR), which the BSP views as an operational adjustment, the Monetary Board on May 23 decided to slash 200 bps off the RRR in three phases or until July 28. A day after reducing key rates, Diokno and his Monetary Board again cut RRR by 100 bps on September 27, effective in November. After announcing that they will trim the RRR again in December, the Monetary Board made good on its promise last October 24 to drop another 100 bps off the RRR – for a total 400 bps reduction for 2019.
BSP Deputy Governor Francisco G. Dakila Jr. said they now see inflation actually start to rise in the first three months of 2020 instead of the fourth quarter of this year. The third quarter, he said, was where inflation has bottomed out, averaging 1.7 percent from the second quarter’s three percent, and also compared to 6.2 percent same time in 2018.
ING Bank’s senior economist Nicholas Mapa said inflation will “likely rebound in the coming months” as base effects loses steam. He further noted that “base effects played a major role in forcing the headling print below one percent for a second straight month in 2019 with heavyweights food and transport posting deflation… But with the base effects from the peak of 2018 fading quickly, we expect inflation to revert to target as early as December.”
Mapa, echoing what seems to be a consensus market expectations, said that the BSP will “resume easing monetary policy in 2020 as (Diokno) looks to help give the domestic economy an added boot amidst the projected global slowdown. With inflation forecasted to remain within target even after base effects wash out, the BSP will continue to work to provide an environment conducive for economic growth for as long as the price objective is in hand.”
ING forecasts 3.1 percent inflation next year, higher than the BSP’s 2.9 percent forecast, both for 2020 and 2021. According to Mapa, the higher inflation projection should “(pave) the way for the central bank to cut policy rates by another 50 bps, with the first move expected in the first quarter 2020.”