July inflation ‘non-issue’ for BSP, monetary policy – analysts

INFLATION is still a non-issue for the country’s monetary authorities, which would give them more space to focus on supporting the Philippines’ economic recovery from the coronavirus pandemic, analysts said on Wednesday.

“In our view, July’s gains are transitory, as demand conditions remain weak,” ANZ research analysts Kanika Bhatnagar and Sanjay Mathur said, adding that while real-time activity indicators have recovered since April, they largely moved sideways in the month.

The reimposition of a modified enhanced community quarantine on Metro Manila and the provinces of Bulacan, Cavite, Laguna and Rizal could further impinge on the recovery in domestic demand, according to them.

The ANZ analysts expect consumer price growth to subside in the coming months and average 1.7 percent in the second half of the year and reiterated their view “that inflation will remain a non-issue for monetary policy for 2021.”

HSBC economist Noelan Arbis said the higher costs of transport, and miscellaneous goods and services last month “are more likely to be one-off price increases.” He forecasts inflation to remain below the midpoint of the Bangko Sentral ng Pilipinas’ (BSP) 2.0 to 4.0-percent target range for the rest of the year.

“With moderate inflation, the BSP is likely to focus more closely on growth in its policy-rate decisions in the months ahead. GDP (gross domestic product) for [the] second quarter [of] 2020 is due to come out [on August 6], and market expectations are for a sizeable contraction,” he added.

Another cause of concern for monetary authorities is the continued increase in coronavirus cases, which was likely to dampen any expected recovery from the third quarter onward, according to Arbis.

“All things considered, we expect the BSP to cut the policy rate by another 25 bps (basis points) to 2 percent by yearend, likely in the fourth quarter,” the economist said.

“Moreover, we forecast an additional 200-bp cut in the RRR ( reserve requirement ratio) by yearend to provide another boost to domestic liquidity. This would bring the RRR down to 10 percent by yearend,” he added.

RRR is the proportion of current deposits that banks need to keep with the central bank against the sum they can loan out to borrowers. It currently stands at 12 percent.

Rizal Commercial Banking Corp. chief economist Michael Ricafort said relatively softer demand conditions, especially in anticipation of the April-to-June GDP data “could still support further monetary easing measures, especially the possible further cut in banks’ [RRR] to provide greater support for the economy…”

The key local policy rate, now at a record low of 2.25 percent, is

already lower than the July inflation rate of 2.7 percent, he added, and this “could fundamentally limit any further rate cut at the

moment, as inflation is expected to remain at familiar levels until the latter part of 2020.”