BSP sees no El Niño impact on inflation and peso-dollar rate

Bangko Sentral ng Pilipinas (BSP) Deputy Governor Diwa C. Guinigundo said the El Niño dry spell’s impact to inflation is still undetermined but based on initial reports, its relatively mild phase may not affect rice prices too much.

Guinigundo also said that while recent days’ peso rate vis-à-vis the US dollar may be reacting in part to worries about the El Niño impact to the agriculture sector, the peso in general is still broadly stable despite foreign exchange (FX) market volatilities. The peso has depreciated back to the 152:$1 level on March 6 and hit a low of 152.75 on March 15.

“I think in general, the peso is more or less broadly stable because the economy will remain resilient and we do not see any major stress or pressure against the peso,” said Guinigundo. “We should see a broad stability of the peso and that’s good for market sentiment and for business, and that should also contribute for greater stability of consumer prices.”

Inflation improved to 3.8 percent in February from 4.4 percent in January, for a year-to-date average of 4.1 percent, which was still above the two-four percent target of the BSP.

Guinigundo said El Niño could be a factor to the inflation path but based on initial reports, its impact may not be as expected.

In the meantime, the Ayala-owned Manila Water said the dry spell has caused water shortage in the Metro Manila east zone area in past weeks due to depletion of water level reserves from the La Mesa Dam. The water supply problem is currently being resolved by the Metropolitan Waterworks and Sewerage System which assured the public that the main water source, Angat Dam, is still sufficient to supply water to all of Metro Manila and nearby provinces.

“Based on the reports, they said it is going to be a mild El Niño,” noted Guinigundo, referring to the dry spell’s effect on the agriculture sector. “I’m sure there will be some adverse impact on agriculture but not as much as one would expect,” he said. “But, we’re still waiting more reports to verify that indeed the El Niño is going to be a mild one.” La Niña, the opposite of El Niño, normally follows the warm phase of ocean temperatures and would offer relief to the after-effects of a dry spell.

Guinigundo said other reports they expect to see in the next days should help to firm up their view on the impact of El Niño on the agriculture sector, particularly on rice prices, which is 9.6 percent of the consumer price index.

He said the dry spell effect will be mitigated by the recently signed rice tarriffication bill and the out-quota rice importation program of the government. However, if the El Niño phenomenon will spread to other countries, this would result to higher global rice prices.

As for the FX market, Guinigundo said the short term volatilities are mostly due to external sources such as worries on Brexit and global oil prices. “These are the factors that can account for the volatility in the FX market. Of course, there are also local factors driving volatility in the FX market in particular the prospect of El Niño and the issue of the reenacted (national) budget. These are just some of the things that may be upsetting the sentiment of the market.”

Guinigundo said that since the macroeconomic fundamentals have never changed which should be reflected in the fundamental movement of the peso against the US dollar, he said – “we continue to see good prospects on economic growth. Inflation is coming down and while the budget has some impasse with respect to the 2019 legislation, we are quite hopeful that this is going to be resolved soon and the previous commitments on public works projects will be carried out and some of these will be completed within the year or in the next few years.” (LCC)