BSP reviews impact of nCoV, lower oil prices on inflation

Published February 5, 2020, 12:00 AM

by manilabulletin_admin


Bangko Sentral ng Pilipinas (BSP) Governor Benjamin E. Diokno said they are looking at two factors that could immediately have an impact on their inflation outlook: The novel coronavirus (2019-nCoV) and the plummeting global crude prices.

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

“These are two of the major factors in the decision-making process in (Thursday’s) policy meeting,” according to Diokno. The Monetary Board of the BSP will have its first policy meeting today (Thursday) and most private sector analysts expect monetary action this early.

“The (BSP) staff is reviewing the inflation outlook in the light of falling world crude prices. It is also revisiting the likely impact of the coronavirus on the global and Asian economies – both in the short-term and medium-term,” said Diokno.

Diokno has reconfirmed last week – after assessing the impact of the Taal Volcano eruption on both the economy and inflation – that he does still expect a cut of at least 50 basis points (bps) for 2020. He said that since the central bank raised interest rates by 175 bps in 2018 and only slashed 75 bps off it last year, they still have a lot of leeway to keep on easing key rates.

Initially, the BSP has assessed that the 2019-nCoV impact could have a lesser hit on economic indicators than previous cases because China and its surrounding neighbors have a better response to it after learning from the SARS coronavirus episode in 2003.

Diokno has said that China and the rest of the region seem better equipped to deal with the new outbreak than previous years. However, a week later and after reporting the first fatality from the coronavirus in the Philippines, and in light of the travel bans imposed by the government and other countries in an effort to stop the 2019-nCoV from spreading uncontrollably, the central bank has new and updated information to make a clearer assessment of the threat in light of the rising death toll.

In the Philippines, there are 80 people being watched for suspected 2019-nCoV. As of Wednesday, three Chinese nationals have been confirmed to have contacted the illness, and one has died on February 1. All three are from Wuhan province of China, which is ground zero for the 2019-nCoV.

In the meantime, the new outbreak is causing global crude oil prices to fall since the quarantines and travel restrictions resulted to lower demand for fuel.

The market is revising 2020 inflation outlook in light of these new developments.

According to ING Bank senior economist Nicholas Mapa, “for the full year, ING still expects inflation to remain within target and (to) average 3.2 percent but peaking in the third quarter.”

The government reported a 2.9 percent inflation for the month of January, higher than December’s 2.5 percent. Both the BSP and the market expected the rate to be higher than 2019’s full-year average of 2.5 percent and most predicted right that it will be 2.9 percent for the past month.

Mapa said supply disruptions from the crop damage of the two tropical cyclones Tisoy and Ursula, plus the Taal Volcano eruption in January, affected the latest inflation rate. “We expect inflation to inch higher and ‘bounce then settle’ as reverse base effects from the 2019 inflation lows nudge prices higher in 2020.”

Mapa said he still expects the BSP to cut rates today (Thursday) by 25 bps. “Given the backdrop for slowing global growth, upside risks to the inflation outlook are dampened considerably with crude oil prices tanking on expectations for weaker global growth and depressed oil demand from China.
With inflation still expected to remain within target and as global growth is likely to be hampered by the spillover effects from the recent 2019-nCoV episode, we expect the central bank to resume unwinding its previous policy tightening to bolster growth momentum and chase the 6.5-7.5 percent growth target.”