Policy focus on core inflation

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The Bangko Sentral ng Pilipinas on Wednesday vowed to pay particular attention to core inflation with a view to keeping headline inflation well under control over the next 18 to 20 months.

BSP Governor Nestor Espenilla Jr. himself bared the focus in a text message to financial reporters, noting that core inflation, which removes the volatile food and oil components from the consumer price index or CPI when computing for the rate at which prices change.

“There’s a need to pay close attention to the core inflation trend which continues to rise through November at 5.1 percent. Monetary policy will need to stay vigilant to keep inflation under firm control amid expected strong economic growth,” he said.

This developed soon after the Philippine Statistics Authority reported that headline inflation dropped sharply to 6 percent in November from 6.7 percent in October, a clear indication that its steady rise past the 4 percent ceiling had been caused by supply-side restraints, particularly food.

According to PSA data, core inflation in November remain elevated at 5.1 percent, faster than in October when it averaged only 4.9 percent.

Analysts have since claimed that easing oil prices and that of rice was the main driver to lower inflation in the November price survey.

For one senior economist, Nicolas Mapa, of ING Bank, the lower inflation outcome in November boosts the likelihood of a policy rate cut next year as early as the second quarter.
“Moderating inflation opens door for rate cut as early as 2Q 2019. Although the Central Bank (BSP) has reiterated its desire to remain vigilant against any signs of second-round effects and anchor expectations, should inflation continue to show this kind of stark deceleration over the next few months, we now open up the possibility of a reversal in BSP’s stance as early as 2Q 2019.

“On top of BSP’s widely projected 200bps cut to reserve requirements, the BSP may opt to slash borrowing costs as early as 2Q 2019 not only because of slowing inflation but also because Philippine economic growth is expected to slow in 4Q 2018 and 1H 2019. Further, should the Fed takes on a less aggressive rate hike stance, with market expectations now showing only two more Fed rate hikes until the end of 2019. If a confluence of decelerating inflation, slower GDP and a dovish Fed align, the chances for a BSP two-pronged easing increases significantly. In light of these developments, we are reviewing our forecast for BSP policy in 2019,” Mapa said.

He said price pressures abated anew in November with CPI basket heavy food items weighing on the overall print. Food items, which account for roughly 38 percent of headline, showed an 8 percent increase in prices, down from 9.4 percent in the previous month as supply conditions improved.

He said utilities and communication were the two other sub-sectors that posted slower increases in growth with utilities up 4.2 percent (from 4.8 percent in October) while communication prices increased 0.4 percent (from 0.5 percent in October). Apart from these three, all other subsectors showed faster inflation.

He said the six percent November print validates that inflation peaked in the 3Q and we can expect this downtrend to continue in the coming months especially with the government making headway in November by passing the rice tarrification bill, securing up to 750,000 MT of rice imports and by rolling back public transport fare adjustments. With these developments, we reiterate that inflation will plunge to an average of 3.6 percent in 2019 from this year’s 5.3 percent. This implies that inflation will drop to about 3 percent by 4Q 2019.

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