Inflation eases anew, hits 21-month low in June

MANILA, Philippines — After an uptick in May, the rise in consumer prices eased anew in June mainly due to the slower growth in food and transportation prices, the Philippine Statistics Authority (PSA) said yesterday.

Headline inflation – the rate of change in the average prices of goods and services typically purchased by consumers – slowed to 2.7 percent in June, the lowest in 21 months, after temporarily rising to 3.2 percent in  May.

This brings the year-to-date average inflation to 3.4 percent, settling well within the government’s target range of two to four percent this year. 

PSA chief Dennis Mapa attributed the downturn in June to the significant slowdown in the growth of the heavily weighted food and non-alcoholic beverages index as well as in the transportation index. 

Growth in the food and non-alcoholic beverages index —which comprises 39.8 percent of the headline rate—was slower at 2.7 percent in June compared with 3.4 percent in May. 

Declines were seen in the prices of staples such as rice, which registered a negative 1.7 percent growth in June from negative 0.7 percent in May, as well as that for corn, which registered a negative four percent growth in June from negative 2.8 percent growth in May. 

Mapa said the deceleration of rice prices may be attributed to the liberalization of rice importation. 

“The weight of rice in the overall food basket is still high at nine percent. But it  is now negative which means price is decreasing. The reason why the food basket inflation dropped is because the rice component is negative,” he said in a briefing yesterday. 

Slowdowns were also seen in the prices of meat; vegetables; as well as sugar, jam, honey, chocolate and confectionery. 

Growth in the transportation index also slowed down sharply to 1.6 percent in June from 3.5 percent in May. 

The Bangko Sentral ng Pilipinas (BSP) said it is confident inflation would settle within the two to four percent target after resuming its downtrend.

BSP Governor Benjamin Diokno said last month’s inflation rate is consistent with the BSP’s prevailing assessment that inflation will firmly settle within the target range.

 “The BSP will keep close watch over latest economic developments to ensure that the monetary policy stance remains consistent with the BSP’s price stability objective while being supportive of economic growth,” Diokno said.

Diokno had said inflation could ease below two percent in the third quarter of the year, giving monetary authorities more room to cut interest rates further.

The last time inflation fell below two percent was in October 2016, at 1.8 percent.

 “We have a lot of policy space considering the global trend of monetary easing. Just be patient. We’ll get there eventually,” the BSP chief said.

The BSP’s Monetary Board opted for a prudent pause and kept interest rates untouched last June 20 to assess the impact of the monetary actions undertaken in May.

The central bank slashed interest rates by 25 basis points last May 9 due to easing inflation and the slower-than-expected gross domestic product (GDP) growth of 5.6 percent in the first quarter from 6.3 percent in the fourth quarter due to the budget impasse.

The regulator also lowered the reserve requirement ratio for big and mid-sized banks by 200 basis points and for small banks by 100 basis points to free up about P210 billion in additional liquidity into the financial system to boost economic activity.

Noelan Arbis, economist at British banking giant HSBC, said the BSP would slash interest rates by 50 basis points in the second half as the rate cuts by the US Federal Reserve would arm the Philippine central bank with further scope to ease monetary policy.

“We forecast another 25 basis points rate cut in Q3, likely in August, given our outlook for GDP growth to still register below six percent in Q2. We also forecast another 25 basis points cut in Q4 given our outlook for 50 basis points of Fed rate cuts in Q3 and Q4, arming the BSP with further scope to ease monetary policy and support growth,” Arbis said.

He added that HSBC also expects the BSP to further slash the RRR level by 100 basis points in the fourth quarter and another 200 basis points next year as the tightness in domestic liquidity remains a constraint.

ING Bank Manila senior economist Nicholas Mapa said the Dutch financial giant has penciled another rate cut by the BSP’s Monetary Board on its rate-setting meeting on Aug. 8.

“With inflation well-within target, BSP will likely look to tap on the accelerator once more after having slammed hard on the brakes in the previous year.  ING is penciling in a policy rate cut by the BSP at its August meeting should inflation continue to show it will remain within target and Q2 growth is projected to be soft,” Mapa added.

For his part, Bank of the Philippine Islands lead economist Jun Neri said he expects another rate cut by the BSP before the end of the year.

“More RRR cuts by the BSP before 2019 ends as room for reduction is enormous whereas space for reverse repurchase cuts is fast narrowing as FOMC has not touched policy rates since Dec. 19 whereas BSP looks poised to deliver one more cut before year-end,” Neri said. – With Lawrence Agcaoili