Inflation rate is expected to decelerate to below 4 percent in the first quarter which will bring the 2019 full-year average to within the target range of 2 percent to 4 percent, economists from First Metro Investment Corp. and University of Asia & the Pacific said in a joint report Thursday.
The economists said the first-half inflation rate would be a continuation of the easing print in December 2018 that settled at 5.1 percent, bringing last year’s average to 5.2 percent.
“With the huge fall in inflation in December, we now see a faster deceleration of inflation rate to below 4 percent in the first quarter 2019 and below 3 percent by the third quarter, with the full-year at 3 percent to 3.5 percent, fairly midway BSP’s [Bangko Sentral ng Pilipinas] 2 percent to 4 percent target,” they said in the Market Call report.
The Bangko Sentral ng Pilipinas said inflation in January likely softened to as low as 4.3 percent from 5.1 percent in December 2018, amid the lower rice prices and electricity rates. The BSP’s Department of Economic Research saw inflation settling within a range of 4.3 percent to 5.1 percent in the first month of the year.
“Domestic oil price hikes, due to higher international crude oil prices and the second tranche of the excise tax adjustment from the Train [Tax Reform for Acceleration and Inclusion] law, is seen to be the primary driver of inflation for the month,” it said.
The Banko Sentral said higher fish and vegetable prices said colder weather conditions and the annual adjustments in the excise taxes of alcoholic beverages from the Sin Tax Law could result in upward price pressures.
“These may be partly offset by lower rice prices, downward adjustment in electricity rates and the slight appreciation of the peso,” it said.
First Metro and UA&P economists said weak crude oil prices, projected by the US Energy Information Administration to average 17 percent lower than in 2018, “should contribute much to this downward trend.”
“With the new expected trajectory of inflation, we think that monetary policy tightening has ended, and with inflation down to below 4 percent [y-o-y] in Q1, BSP will likely provide more liquidity to banks [especially due to Basel-3 requirements] via lower reserve requirements and more purchases of foreign exchange, also as BSP rebuilds its GIR [gross international reserves],” they said.
Bangko Sentral Governor Nestor Espenilla Jr. said last week the regulator might consider the resumption of reserve requirement reduction following the deceleration of inflation rate.
Espenilla said in a speech read by Deputy Governor Chuchi Fonacier during the annual reception for the banking community Jan. 25 that the Bangko Sentral remained on track of the medium-term goal of a phased and gradual approach in reducing the reserve requirement ratio of banks to a single-digit level.
“Our latest forecasts indicate that inflation will return to the 2 to 4 percent target this year and in 2020,” his statement said.
“We now see scope for further reduction on the RRR as we see inflation returning firmly to within target and with inflation expectations stabilizing,” Espenilla said.
Espenilla is currently on an extended medical leave for his continuing his treatment for a tongue cancer that was diagnosed latter part of 2017.
He said 2018 was an exceptional year for the Bangko Sentral in pursuit of bold financial sector reforms. He said the regulator introduced several refinements in the Interest Rate Corridor system which provided BSP with greater operational flexibility.
He said Bangko Sentral was able to reduce reserve requirements ratio by a total of 200 basis points as operational adjustments.
“This keeps us on track of the medium-term goal of a phased and gradual approach in reducing RRR to single-digit level,” Espenilla said.
ING Bank Manila senior economist Nicholas Mapa said in a report Thursday that given Espenilla’s well-advertised pledge to reduce RRR to single digits in the next four years and his ominous use of “scope” in his recent statements, there could be “an outside chance” that BSP will cut RRR at a non-policy meeting in February with the base case being a cut in the first quarter as the BSP awaits further data to determine if liquidity conditions are indeed tight.
“Furthermore, with the Fed now signaling patience and probably the biggest potential headwind on the shelf for now, perhaps Espenilla can think of easing off the brake pedal by cutting policy rates eventually to allow the economy a little more “scope” to regain its previous growth momentum,” Mapa said.
Inflation peaked at a nine-year high of 6.7 percent in October, before easing to 6 percent in November and 5.1 percent in December as the immediate measures implemented by the government to curb the faster increases in consumer prices took effect.