MANILA – The slight uptick in inflation rate last month will not stop Philippine monetary authorities from slashing key policy rates this month, London-based think tank Capital Economics said Wednesday.
Inflation clocked in at 3.2 percent in May, the first uptick in seven months since it started decelerating in October 2018.
In its data response, Capital Economics said it continues to expect another 25-basis point cut in rates from Bangko Sentral ng Pilipinas (BSP) during its next meeting on June 20.
“Today’s data will not dissuade the bank from making further cuts. Following the release, BSP governor Benjamin Diokno gave about as clear a signal of future policy as he could give, saying that ‘rate cuts are inevitable’ and that the uptick in inflation ‘does not constitute a trend’.”
The central bank lowered interest rates last month – its first policy rate adjustment since last year’s sharp tightening cycle.
Diokno earlier said the inflation uptick in May cannot be seen as a significant deviation from the trend.
“Given that inflation is set to fall back, an additional cut is likely in the second half of this year,” Capital Economic said.
Falling inflation should also enable further cuts to the BSP’s reserve requirement ratio (RRR)—the amount of cash a bank must hold in reserve against deposits made by customers, it said.
“The rate was lowered 100 bps to 17 percent at the end of May and a further 100 bps of cuts are planned before the end of July. We are forecasting another round of cuts before the year is through, taking the RRR to 14 percent,” the think tank said.
Capital Economics noted that the uptick in food inflation will continue.
“For one thing, the pickup was mainly due to base effects from the falls in fish and vegetable prices in May of last year, which will disappear next month. Encouragingly, rice prices continued to decline, and should carry on doing so as the boost to supply from import liberalization feeds through further,” it said.
“Another encouraging sign was that transport price inflation dropped back having risen in recent months. Our forecasts for Brent crude to end 2019 at $60 per barrel imply that this will continue,” it added.
Even if the decline in food and fuel prices were to stall for the rest of the year, the large spikes in both price categories last year meant that year-on-year inflation is likely to turn negative in the second half of 2019, according to Capital Economics.
“Overall, we still expect headline inflation to average just 1.7 percent year-on-year over the remaining months of the year, which would be below the central bank’s 2-4 percent target range,” it said. (GMA News)
