Inflation seen dropping further below 4% in 2019 first quarter

MANILA, Philippines — BSP, economists expect prices to ease faster Inflation is expected to decelerate at a faster pace of below four percent in the first quarter, according to the investment banking arm of the Metrobank group First Metro Investment Corp.

In the latest issue of The Market Call, FMIC and the University of Asia and the Pacific (UA&P) said the headline inflation rate may also fall below three percent by the third quarter.

“Weak crude oil prices, projected by the US Energy Information Administration to average 17 percent lower than 2018, should contribute much to this downward trend,”  the report said.

Similarly, British banking giant HSBC sees inflation easing back to the two to four percent target of the Bangko Sentral ng Pilipinas (BSP) by  March, paving the way for the resumption of the reduction of the level of deposit banks are required to keep with the central bank. 

In a report, HSBC economist Noelan Arbis said  the slowdown in inflation may prompt the BSP  to reduce the reserve requirement ratio by 100 basis points in the second quarter. “Based on our current inflation trajectory, inflation is likely to be more firmly within the BSP’s target by March , enabling the BSP to cut the reserve requirement ratio in the secondf quarter. That said, a faster decline in inflation could prompt an earlier move,” he said.

The BSP said the January inflation likely eased to a range of 4.3 to 5.1 percent  despite higher prices of oil as well as alcohol and tobacco products due to the second tranche of adjustments on excise taxes under the tax reform law.

The central bank’s Department of Economic Research (DER) said domestic oil price hikes, due to higher international crude oil prices and the second tranche of the excise tax adjustment from Republic Act 10963 or the Tax Reform for Acceleration and Inclusion (TRAIN) Law, is seen to be the primary driver of inflation for the month of January.

In addition, BSP economists also cited higher fish and vegetable prices due to colder weather conditions.

Likewise, they added the annual adjustments in the excise taxes of alcoholic beverages from the Sin Tax Law may result in additional upward price pressures.

 “These may be partly offset by lower rice prices, downward adjustment in electricity rates, and the slight appreciation of the peso,” the BSP said.

Growth in consumer prices is expected to average between three percent to 3.5 percent for this year.

This should sit well within the two to four percent target of the central bank for 2019.

Headline inflation has already fallen from a peak of 6.7 percent in September to October to 5.1 percent in December and is expected to continue falling sharply over the coming months because of falling oil prices.

The Philippine Statistics Authority (PSA) is expected to announce the January 2019 headline rate next week.

The Bangko Sentral ng Pilipinas (BSP) raised policy rates by a total of 175 basis points last year to rein in inflation.

Because of this, consumer spending, which slowed to a four-year low in the third quarter of 2018, should have a strong recovery because of the fast pace of decline in the growth of consumer prices, the FMIC said.

Looking ahead, the central bank said authorities would remain watchful of evolving inflationary conditions to ensure that the monetary policy stance remains consistent with the BSP’s price stability mandate.

Inflation accelerated to 5.2 percent in 2018 from 2.9 percent in 2017 due to higher oil and food prices as well as the weak peso. It exceeded by the BSP’s two to four percent target.