In­fla­tion seen fall­ing be­low 6% in Dec

The Philippine Star - - BUSINESS - By LAWRENCE AG­CAOILI

No­mura Se­cu­ri­ties Ltd. sees De­cem­ber in­fla­tion fall­ing be­low six per­cent for the first time in four months, giv­ing the Bangko Sen­tral ng Pilip­inas (BSP) more room to fi­nally keep in­ter­est rates steady.

In a re­search note ti­tled “Philip­pines: In­fla­tion has not only peaked but is fall­ing more sharply,” No­mura econ­o­mist Euben Paracuelles said the com­pany has low­ered its in­fla­tion fore­casts to 5.2 per­cent in­stead of 5.4 per­cent this year and 3.7 per­cent in­stead of 4.4 per­cent next year.

“Head­line in­fla­tion could con­tinue to fall fairly sharply in the com­ing months, as ad­just­ments to en­ergy-re­lated com­po­nents be­come more com­plete,” he said.

He pointed out the trans­port com­po­nent does not yet ap­pear to fully re­flect the re­cent drop in re­tail fuel prices, while the trans­port fare hikes in late Oc­to­ber, which likely pro­vided some off­set, have al­ready been rolled back.

Paracuelles said in­fla­tion would fall fur­ther to around 5.5 to 5.7 per­cent in De­cem­ber, on an as­sump­tion that oil prices would re­main at cur­rent lev­els for the rest of the year and the de­cline in rice prices would likely con­tinue over the near term.

In­fla­tion av­er­aged 5.2 per­cent from Jan­uary to Novem­ber, ex­ceed­ing the two to four per­cent tar­get set by the BSP for 2018 to 2020. The con­sumer price in­dex eased for the first time to a four-month low of six per­cent in Novem­ber from a near-decade high of 6.7 per­cent in Oc­to­ber.

The BSP’s Mon­e­tary Board raised in­ter­est rates by 175 ba­sis points in five straight rate-set­ting meet­ings this year to rein in in­fla­tion­ary pres­sures. It jacked up rates by 25 ba­sis points for the first time in three years last May 10 fol­lowed by an­other 25 ba­sis points last June 27, 50 ba­sis points last Aug.9, 50 ba­sis points last Sept. 27, and 25 ba­sis points last Nov. 15.

The next rate-set­ting meet­ing of the cen­tral bank is sched­uled on Dec. 13.

With the lower in­fla­tion fore­casts for 2018 and 2019, Paracuelles said No­mura no longer ex­pects rate hikes from the BSP.

“Con­se­quently, given that – un­like other re­gional cen­tral banks – mon­e­tary pol­icy is firmly tied to the in­fla­tion out­look, we now ex­pect BSP to leave pol­icy rates un­changed at 4.75 per­cent through 2019 and 2020,” he added. No­mura pre­vi­ously ex­pected an­other 75-ba­sis point rate hikes by the sec­ond quar­ter of 2019.

He said the tra­jec­tory of No­mura’s new fore­casts sug­gests head­line in­fla­tion would fall sharply through­out 2019 and reach the lower end of BSP’s two to four per­cent tar­get by the fourth quar­ter. “With head­line in­fla­tion fall­ing more sharply,

we think in­fla­tion ex­pec­ta­tions will also start to ad­just lower in the com­ing months, given they tend to form adap­tively. This, in our view, has been and will re­main a main con­sid­er­a­tion for BSP: given in­fla­tion ex­pec­ta­tions are highly el­e­vated, we see room for a sig­nif­i­cant down­trend be­fore set­tling within the two to four per­cent tar­get, pro­vid­ing BSP with some room to main­tain pol­icy set­tings,” he said.

Parac­ulles said the drop in oil prices and the likely pas­sage of the “rice tar­if­fi­ca­tion bill” be­fore year-end are the main driv­ers of the forecast change, although the fa­vor­able base ef­fects that would kick in at the start of the year will also have an im­pact.

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