Inflation slows; BSP to remain watchful

INFLATION surprisingly eased in June but the central bank may continue to tweak its policy with food prices expected to continue climbing.

Philippine Statistics Authority (PSA) data released on Friday showed consumer prices rising by 4.4% last month, slowing from 4.5% in May but accelerating from the 2.7% recorded a year earlier.

The headline print fell within the Bangko Sentral ng Pilipinas’ (BSP) 4.1-5% forecast and was slower than the 4.6% median in a BusinessWorld poll of economists.

The result put first half inflation at 4.2%, also within the BSP’s 3-5% target for 2014 and still under its 4.4% forecast for the year.

Central bank Governor Amando M. Tetangco, Jr., in a text message to reporters, said inflation remained elevated despite the easing.

“Therefore, we continue to be mindful of the risks to achieving the inflation target that remain, including second round effects that may ensue from supply-driven commodity price increases,” Mr. Tetangco said.

He added that the BSP would likewise be on the lookout for shifts in investor sentiment and changes in global growth dynamics that could result from monetary policy adjustments by advanced economies, as these could lead to financial market volatilities.

“BSP will adjust policy levers as appropriate to keep a lid on inflation and ensure financial stability pressures are in check,” Mr. Tetangco said.

Excluding food and energy items, core inflation slowed to 2.8% in June from 3.1% in the previous month.

“Slower annual increments were recorded in the indices of alcoholic beverages and tobacco; housing, water, electricity, gas and other fuels; transport; and recreation and culture,” the PSA said.

The food index, however, rose by 7.8% in June from 7.1% in May and 2.3% in the same month in 2013.

“Higher annual upticks were seen in all the food groups except in the fish and fruits indices. The annual gain of the fish index eased to 5.4% and in fruits index, 4.6%,” the PSA said.

Power distributor Manila Electric Co. announced last month that rates would be lower by P0.84 per kilowatt-hour in June due to lower generation charges.

Meanwhile, Bureau of Agricultural Statistics data showed the retail price of well-milled rice up by 20% from a year ago to an average P42.85 per kilo by the last week of June.

Analysts said inflation would likely accelerate in the coming months, prompting the central bank to continue adjusting its policy.

Barclays PLC economist Rahul Bajoria, in a research note, said inflation was starting to move towards the top end of the target band and “is likely to stay there through the third quarter.”

“The BSP has lowered its target inflation range to 2-4% in 2015, which creates some concerns about the upper bound of the range being breached next year,” Mr. Bajoria said.

Emilio S. Neri, Jr., Bank of the Philippine Islands lead economist, likewise said that the inflation path was tilted towards a higher trajectory and “may still threaten the BSP’s inflation target of 2.0-4.0% in the coming year”.

“The BSP will likely shelve any adjustments to the reserve requirement ratio (RRR) and wait for the recent SDA (special deposit account) hike to feed into the system, moreso that M3 growth for the month of May has already decelerated to sub-30% and while momentum towards a sub-25% print is likely to be seen as we move towards end-2014,” Mr. Neri said.

“The surprise deceleration of the inflation print may lead the BSP to pause from hiking the SDA rates on their July 31 policy meeting but may still adjust its RRP (reverse repurchase) policy (or overnight borrowing) rate to signal that it has begun its tightening cycle.”

“However, since the headline print is still expected to continue rising through August and therefore stray further away from the upper-end of its target for 2015, we believe the BSP will hike rates (both SDA and RRP) at the September 11 policy meeting.”

Barclays’ Mr. Bajoria also noted that the BSP’s room to hold its policy rates steady has been “shrinking.”

“While the BSP did not raise the policy rate in its June policy meeting, it did increase the rate on SDAs by 25bp to 2.25%. We think that move reflects the bank’s intention to send a signal on inflation, but not to attract more capital inflows…,” he said.

“We think the SDA rate hike should have assuaged some concerns on inflation, though we expect the upside risks to prices to persist. We think [the June] inflation print will likely lead to another SDA rate hike in the July meeting.”

Jeff Ng, economist at Standard Chartered Bank in Hong Kong, said: “We expect inflation to remain on an uptrend. Food inflation has continued to climb, as domestic supply pressures have heightened food price increases … We think the central bank will introduce some measures in the second half of the year.”

Citi Research analyst Jun Trinidad noted that “until the government’s rice imports augment supply that will discourage traders from cornering upcoming rice output, the demand-supply gap will probably sustain elevated rice prices.”

“On the back of our updated monthly extrapolation that continues to show [the consumer price index or CPI] probing 5% either in September-October, the recent calm CPI would be followed by upside inflation pressures.”

But for Benjamin E. Diokno, economist at the University of the Philippines, inflation could moderate in the second half.

“Assuming the government is able to fix the supply gap through imports and higher domestic production, I expect food prices to taper off in the second half even with mild El Niño. Moreover, money growth has slowed,” he added.

Last June 19, the BSP’s policy-setting Monetary Board kept its overnight borrowing and lending rates at record lows of 3.5% and 5.5%, respectively, for a 13th straight meeting, with monetary authorities noting that the inflation environment remained manageable.

Bank reserve requirements were left unchanged as well. Strong liquidity growth over the last year had prompted the Monetary Board to hike these ratios by one percentage point each during its March 27 and May 8 meetings.

SDA rates across all tenors, however, were hiked by 25 basis points to 2.25% from 2%.

The Monetary Board next meets to discuss policy on July 31.
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