MANILA – Further deceleration of the Philippines’ inflation rate in September made economists discount further cuts in the Bangko Sentral ng Pilipinas’ (BSP) key policy rates in the near term.
The rate of price increases slowed to 2.3 percent last September from the previous month’s 2.4 percent, resulting in a 2.5 percent average in the first nine months this year.
Average inflation to date is near the lower end of the government’s 2-4 percent target until 2022.
In a research note, ING Bank Manila senior economist Nicholas Mapa said the domestic inflation rate is still “muted despite unfavorable base effects given anemic demand and a strong peso”.
Citing government data, Mapa said the acceleration in the transport index was countered by soft food inflation last month.
The peso continues to strengthen against the US dollar, accelerating by around 4.78 percent since the start of the year and is helping cushion imported inflation, he said.
Mapa said the low inflation environment, along with the economic recession, are factors for monetary officials not to touch the BSP’s key rates for now since these have been slashed off a total of 175 basis points since the start of the year.
“Inflation will likely settle at 2.4 percent in 2020 and will help preserve purchasing power for Filipino consumers given the economic recession. However, we also note that the downtrend for inflation points to fading economic momentum as consumer demand remains constrained despite recent moves by the government to gradually reopen the economy,” he added.
Meanwhile, ANZ Research also forecasts further deceleration of the domestic inflation rate due to lesser price pressures and higher base effects.
“We continue to expect price pressures to remain mild and not present any challenge to the current monetary policy stance,” it said in a research note.
While economic activity is normalizing after being hampered by the community quarantine measures, it said, this remains far from pre-Covid levels.
It said the manufacturing index remains low along with the employment index but added employment figures are improving.
ANZ Research said the benign inflation outlook “has provided sufficient leg-room to monetary policy.”
“At the same time, sufficient liquidity in the financial system and incomplete transmission of previous cuts in the policy rate do not make a case for further easing at this stage,” it added.
Rizal Commercial Banking Corporation (RCBC) chief economist Michael Ricafort said slashing further the BSP’s key policy rates this time is challenging but he is open to further slash in banks’ reserve requirement ratio (RRR).
Ricafort said BSP’s 2.25 percent rate for the reverse repurchase (RRP) facility is below the 2.3 percent inflation rate as of last September.
He said “for the meantime, the lack of additional funding for fiscal stimulus measures would still lead to more monetary easing measures that help reduce borrowing costs.”
“Thus, for the coming weeks/months, any further monetary easing measures, especially any further cut in banks' RRR, remain possible as the economy needs all the support measures that it could get at this time largely due to the adverse economic effects of the Covid-19 lockdowns/pandemic, amid the lack of additional funding for more fiscal stimulus measures, thereby making more monetary easing measures possible to help improve prospects of economic recovery, going forward,” he added. (PNA)
