Capital Economics, a London-based research agency, said it expects the Bangko Sentral ng Pilipinas to start easing its policy stance as early as the second quarter this year, amid the declining inflation rate.
Capital Economics said in a report over the weekend that a further sharp drop in inflation in December supported its view that the central bank would start to loosen monetary policy soon.
Inflation rate fell from 6 percent in November to 5.1 percent in December, a seven-month low. This brought full-year inflation in 2018 to 5.2 percent, albeit higher than the official target range of 2 percent to 4 percent.
“A breakdown of the data shows that falling transport and food price inflation were again the main drivers behind the fall. We expect both these factors to push inflation down further over the coming months, and for inflation to drop back to within the BSP’s 2 to 4 percent target by the middle of the year,” Capital Economics said.
“The BSP raised interest rates by a cumulative 175 bp [basis points] last year to combat high inflation. But with price pressures set to ease further and the economy slowing, we think the central bank will start loosening policy before too long. We currently have two 25 bps cuts pencilled in for 2019, with the first cut likely to come in the second quarter,” it said.
The December figure was the first time that inflation settled below the 6 percent level since it reached 5.7 percent in July 2018.
Bangko Sentral Deputy Governor Diwa Guinigundo said the supply-driven inflation process that existed in 2018 would not be persistent and therefore short lived.
“The aggressive monetary tightening the BSP implemented from May to November was therefore aimed only at ensuring that the supply shocks from more than 60 percent increase in oil prices and the significant inflation rates in rice, fish, meat and vegetables did not evolve into sharp gains in wages, transport, and prices of other services,” Guinigundo said.
He said the decisive action of the government to immediately undertake non-monetary measures against inflation was pivotal in the anti-inflation efforts.
“Our forecast as of today remains at 3.2 percent inflation for 2019 and 3 percent for 2020,” he said.
Nicholas Mapa, senior economist of ING Bank Manila, said risks to the inflation outlook appeared tilted to the downside and expectations were now more anchored especially with more imported grains currently on delivery over the next few weeks, and the Rice Tarrification bill set for signing and energy prices declining.
“With inflation trending back to the Bangko Sentral ng Pilipinas’ target of 2 to 4 percent, the case for the BSP to reverse its stance as early as second quarter of 2019 has gained considerably,” Mapa said.
He said on top of BSP’s widely-anticipated 200-basis point cut to reserve requirements scheduled for the year, the BSP would likely slash borrowing costs as early as the May 9 meeting to help bolster slowing growth momentum with its price stability mandate safeguarded.
“With market anticipating a less aggressive Fed rate hike cycle in 2019, BSP may be afforded a window to walk back its own aggressive rate hike salvo from 2018. With the stars aligning for decelerating inflation, a more dovish Fed and possibly slowing growth momentum, the chances for a BSP two-pronged easing in the first half has increased significantly,” Mapa said.
