Inflation to ease further in H2, says HSBC

MANILA, Philippines - The country’s inflation rates are expected to continue on a deceleration mode in the second half of the year, a recent study by HSBC Global Research said.

“Both headline and core inflation decelerated significantly in April. We expect headline prices to be below three percent year-on-year in the next six months, provided there is no significant disruption of food supply,” it said.

HSBC said the continuing decline in the prices of basic good and services may also compel the bank regulators to implement a further cut in its special deposit account (SDA).

SDA is a monetary policy instrument deployed by the Bangko Sentral ng Pilipinas for the purpose of managing excess liquidity in the financial system. These are short-term liability products of BSP with tenors ranging from three days to two months. They are relatively risk-free investment in terms of credit risk since it is issued by the BSP.

“The central bank, thus, will be tempted to slash the SDA rate further to support growth and reduce operation costs,” it said.

HSBC noted that headline inflation slumped again in April. 

“This reflects abundant food supply and slowing oil prices. The tapering off of the ‘sin tax’ effect coupled with a favorable base effect also dragged down core prices,” it said.

“We expect headline inflation to stay near the bottom of the BSP’s three to five percent target in the next six months. This means that the BSP has room to reduce the SDA rate further to support domestic demand as well as lower operation costs,” it added.

Since January 2012, year-on-year headline inflation has been below four percent - a trend that is expected to be maintained until the end of 2013. 

“With food supply abundant, oil prices contained and the month-on-month effects of the “sin tax” tapering off, headline inflation is likely to be below three percent until October,” it said.

HSBC noted that when the central bank meets on June 13, it will have plenty of policy space to focus on other priorities such as boosting domestic demand and reducing operation costs. 

Several key data points, HSBC said, would be released by the June meeting, including first quarter GDP, March exports, and remittances. 

“Thus far, economic indicators have pointed to decelerating growth momentum, with exports contracting in the first two months of the year,” it said.

With external demand weakening, HSBC said the outlook for Philippine exports is not supportive. 

“Therefore, the lift to growth will have to come from the domestic side. Remittances will maintain its momentum but the drag from exports requires further support. Both monetary and fiscal authorities will do what they can,” it added.