BSP forecasts May inflation to range from 2.8% to 3.6%

MANILA, Philippines — Inflation may settle between 2.8 and 3.6 percent in May amid lower oil and rice prices, as well as cheaper electricity rates, according to the Bangko Sentral ng Pilipinas.

The BSP’s Department of Economic Research said upside price pressures for May could emanate from the jeepney fare adjustment in Central Visayas and higher prices of selected food items.

At the same time, the BSP said positive base effects could account for temporary price pressures in May.

On the other hand, the central bank said lower rice and domestic oil prices alongside downward adjustment in electricity rates are seen to temper inflation for May.

“Looking ahead, the BSP will continue to be watchful of evolving price trends to ensure that the monetary policy stance remains consistent with maintaining price stability,” the central bank said.

The downtrend in inflation as well as slower-than-expected gross domestic product (GDP) growth has allowed the BSP to reverse its tightening cycle by slashing interest rates by 25 basis points last May 9.

This was followed by the reduction in the reverse requirement ratio for big and mid-sized banks by 200 basis points and for small banks by 100 basis points that is expected to free up P210 billion in additional funds into the financial system to boost the economy.

The tightening cycle of the central bank saw interest rates rise by 175 basis points in five straight rate-setting meetings between May and November to prevent inflation from spiralling out of control.

Meanwhile, London-based Capital Economics said the growth in consumer prices likely decelerated further to 2.5 percent in May as rice prices continued to tumble and gasoline prices fell back.

In a briefing yesterday, the macroeconomy research firm said these developments increase the possibility of more rate cuts within the year.

“Weekly data show that rice prices have continued to fall, despite weather-related disruption to the harvest, as imports have bolstered supply. Year-on-year changes in rice prices are now negative ,” Capital Economics said.

It also noted a fallback in gasoline prices in May after a sustained rebound since February, suggesting easing pressure on the headline rate from transport inflation.

“We have penciled in a 0.5 percent-point drop in the headline rate, to 2.5 percent year-on-year,” said the firm.

Capital Economics said the continued deceleration in the headline rate would “reassure the central bank” and encourage it to continue its easing cycle.

The BSP has so far unwound some of the policy tightening last year by cutting policy rates by 25 basis points in May.

“We are forecasting another two 25-bps cuts to the policy rate, taking it down to four percent by the end of 2019,” Capital Economics said. – Czeriza Valencia