Inflation seen declining to 3.2%

MANILA, Philippines - Analysts have trimmed down their inflation forecasts for the year, following the April result that hit a 13-month low of 2.6 percent.

“Inflation again surprised on the downside in April, driven not only by favorable supply-side conditions, but also a drop in core inflation,” Nomura economists Euben Paracuelles and Lavanya Venkateswaran said in a research note.

As a result, Nomura’s inflation outlook for this year and the next were revised downwards. Inflation is expected to hit 3.2 percent this year before slightly accelerating to four percent in 2014, the economists said.

The outlooks were down from original estimates of 4.6 percent and 4.5 percent, respectively.

Inflation hit 3.2 percent last year, falling at the low-end of the Bangko Sentral ng Pilipinas’ (BSP) three to five-percent target. As of April, consumer prices rose by an average of three percent.  

Justifying the revisions, Paracuelles and Venkateswaran said “relatively subdued commodity prices” would likely temper the impact of demand-side inflation driven by strong economic growth.

For his part, DBS economist Eugene Leow, in a separate research note, said a strong peso, which makes imports more affordable, would likely contain inflation this year. The bank’s forecast was revised down to 3.4 percent from 3.8 percent initially.

For 2014, the Singapore-based lender kept its inflation outlook at 4.2 percent.

“Several factors including a strong peso, easing oil prices, and stable food prices have combined to keep inflation low despite robust economic activity,” Leow said.

With prices of basic goods and services stable, Nomura project the BSP would have more leeway to keep interest rates low and to even cut special deposit accounts (SDA) rate again.

In its previous three policy meetings, the central bank slashed the interest it offers SDA placements- fixed-term deposits by banks and trust departments with the BSP- by an aggregate of 150 basis points to two percent.

The measure, the agency has said, was meant to push out funds from the facility in order to finance economic activity and deepen the capital markets. As of April 12, SDA deposits totaled P1.945 trillion.

“In terms of monetary policy implications, we believe this not only justifies Bangko Sentral’s special deposit account rate cuts, but also provides reason to cut them further,” Paracuelles and Venkateswaran said.

“Our forecast is for another 50 basis-point cut in SDA rates to 1.50 percent at the next meeting,” they added. The next policy meeting is on June 13.

For his part though, DBS’ Leow said the “room for further rate cut has become limited.”

“While consumer prices have stayed low, asset prices have run up significantly. Aggressive rate cuts may lead to a further buildup of asset prices and risk destabilizing the economy when the cycle turns,” he explained.