By Lourdes O. Pilar and Reicelene Joy N. Ignacio, May 8 2019; Business World

Image Credit to Business World

INFLATION eased for the sixth straight month to its slowest pace in 16 months in April, the Philippine Statistics Authority (PSA) reported on Tuesday, giving more room for the central bank to loosen monetary policy.

April’s headline rate of three percent was down from 3.3% in March and 4.5% a year ago, and was the slowest in 16 months or since the 2.9% recorded in December 2017.

April’s reading was lower than the 3.1% estimate median in BusinessWorld’s poll of 10 economists late last week. The latest figure also fell within the Bangko Sentral ng Pilipinas’ (BSP) own 2.7%-3.5% estimate for that month.

Year-to-date, inflation clocked in at 3.6% — falling within the BSP’s 2-4% target range for 2019 and creeping towards the BSP’s three percent forecast average for the entire year.

Core inflation, which strips out commodities prone to volatile price swings, slowed to 3.4% in April from 3.5% in March.

The PSA attributed the downtrend primarily to the slower annual increase in the heavily weighted food and non-alcoholic beverages index at three percent in April from 3.4% in March and 5.9% in April 2018.

The PSA also noted slower annual increments in the following commodity groups: alcoholic beverages and tobacco (9.9% in April from 10.8% in March); clothing and footwear (2.4% from 2.5%); housing, water, electricity, gas, and other fuels (3.2% from 3.4%); furnishing, household equipment and routine maintenance of the house (3.2% from 3.4%); health (3.7% from 3.9%); as well as restaurant and miscellaneous goods and services (3.5% from 3.7%).

“The recent inflation reading validates our efforts towards stabilizing inflation so that the country’s buoyant economic growth, along with key reforms, remains unimpeded,” the National Economic and Development Authority quoted its director-general, Socioeconomic Planning Secretary Ernesto M. Pernia, as saying in a statement.

BSP Governor Benjamin E. Diokno said in a separate statement that April’s inflation rate is consistent with the central bank’s expectation of inflation settling within the 2-4% target range for 2019 and 2020.

At the same time, Mr. Diokno said that the BSP will keep watch of price risks especially as its Monetary Board conducts its third policy review for the year on Thursday.

“[T]he continued increase in global crude oil prices and possibility of a prolonged El Niño episode could be a source of upside pressures over the near term. On the other hand, the weakening global economic environment could present downside risks to inflation,” Mr. Diokno said.

“Against these upside and downside risks, the BSP continues to keep a close watch over price developments in the country and shall consider all relevant data at its next monetary policy meeting… to ensure that the monetary policy stance remains consistent with the BSP’s primary mandate of price stability conducive to a balanced and sustainable growth of the economy.”

The central bank governor earlier said that the BSP will continue to be data-driven in its decision-making amid mounting expectations of monetary policy easing.

The key policy rate is now at a decade-high of 4.75%, reflecting the cumulative 175-basis-point (bp) increase in benchmark yields adopted in five meetings last year as the BSP sought to douse inflation expectations.

The central bank also slashed the reserve requirement ratio in two one-percentage-point moves in March and June 2018 that brought mandatory reserves for universal and commercial banks to 18% of their total deposits.

For HSBC Global Research economist Noelan Arbis, “the time is ripe” for the central bank to start loosening its monetary policy.

“Slowing inflation means that the BSP should be able to place a greater emphasis on growth,” Mr. Arbis said in an e-mail.

Mr. Arbis expects gross domestic product (GDP) growth to slow to six percent in 2019 from 2018’s 6.2% due to the four-month delay in enacting the 2019 national budget, high bank lending rates, low liquidity and tepid remittances growth. “Growth may slow further in subsequent quarters if the BSP does not engage in immediate and adequate monetary accommodation,” he said.

M3 — considered the broadest measure of money circulating in an economy — grew 4.2% year-on-year to about P11.4 trillion in March, slower than the 7.1% expansion in February and January’s 7.6% increase. The latest recorded pace is the slowest since September 2012.

Meanwhile, outstanding loans increased by 9.9% year on year in March, slower than the 13.7% pace logged the previous month. Inclusive of reserve repurchase agreements, bank lending growth decelerated to 9.3% from 13.9% in February.

ING Bank NV Manila Branch senior economist Nicholas Antonio T. Mapa said that “[w]ith the inflation objective in hand and [economic] growth to take a hit in the [first half of the year], it would be about time for BSP to ease off the brakes from ‘crisis mode’ and finally nudge on the accelerator to zoom to faster growth.”

Sun Life Financial economist Patrick M. Ella “fully expects” the BSP to deliver a 25-bp policy rate cut as well as an RRR cut of 100 bps given that food costs have been declining in previous months.

In an e-mail to reporters, Standard Chartered Bank economist Chidu Narayanan said he foresees a 25-bps cut in policy rate. “The decision is likely to be a close call… The combination of falling inflation and slowing growth is likely to lead BSP to start unwinding part of the 175 bps of rate hikes from 2018. We see a total 100 bps of rate cuts this year, taking the policy cash rate to 3.75% by year-end.”

In a separate e-mail, Security Bank Corp. economist Robert Dan J. Roces said slashing the RRR may come before cutting the key policy rate. “[D]omestic economic conditions have surely improved and thus gives the BSP room for easing,” he explained. “However, liquidity is tightening. Thus, reductions in both the RRR and policy rates may occur, but I think the precedence may be [reserve requirements] first, then interest rates. They might do this slowly, sort of testing the waters first, via RRR cut of 100 bps.”

While expectations were mixed on the timing of policy easing, there is little disagreement among analysts on the pace of general price increases moving forward.

“Inflation expectations… appear to be well entrenched… with the specter of overblown inflation proportions a fading memory just a few months from the recent peak,” said ING Bank’s Mr. Mapa.

Security Bank’s Mr. Roces said: “I expect inflation in May to further ease, minus price pressures from further oil price increases which seem to be stabilizing as of late,” while for Sun Life’s Mr. Ella: “[It’s] too early to tell, but I’m pretty confident it’s likely below 3%.” — Lourdes O. Pilar andReicelene Joy N. Ignacio