Easing inflation builds case for more interest rate cuts

MANILA, Philippines — The Bangko Sentral ng Pilipinas (BSP) is  expected to cut policy rates in August after inflation continued its downturn in June, London-based Capital Economics said over the weekend.

Capital Economics said the deceleration of the growth in consumer prices to 2.7 percent in June from 3.2 percent in May would be sustained because of falling food and transport prices, as well as base effects.

“Barring any hints to contrary, a cut is likely at the central bank’s next meeting in August. And with inflation set to fall further, we expect more easing thereafter, taking the policy rate from 4.5 percent now to 3.75 percent by early 2020,” said Capital Economics.

Growth in the headline rate in June, which was the slowest in almost two years, was attributed to the significant slowdown in the growth of the heavily weighted food and non-alcoholic beverages index as well as in the transportation index.

With falling crude prices, there is a possibility that inflation will turn negative by the end of the year as fuel prices are expected to be stable, Capital Economics said.

“We think inflation will begin to fall more rapidly in the months ahead. For one thing, transport price inflation is likely to fall further on the back of lower fuel prices,” it said.

“Our forecasts for Brent crude to end 2019 at $60 per barrel imply that there will be little upward pressure from global oil prices. But even if they did rise over the remainder of this year, they are still likely to be lower than the second half of last year, meaning that year-on-year inflation is likely to turn negative,” Capital Economics said.

Food prices are also expected to decline further with the continued implementation of the rice import liberalization law.

“The liberalization of rice imports has kept downward pressure on rice prices,” said Capital Economics.

As inflation accelerated sharply in the second semester of last year, base effects will come into play in the second half.

“And as the surge in prices in the second half of last year enters the annual comparison, year-on-year inflation is set to tumble. Overall, we expect headline inflation to average just 1.5 percent year-on-year over the second half of 2019, below the central bank’s two to four percent target range,” said Capital Economics.