ING: Expect July inflation at 2.4%, another rate cut

MANILA, Philippines — Inflation likely eased for the second straight month at 2.4 percent in July due to stable food prices and base effects, Dutch financial giant ING Bank said.

Nicholas Mapa, senior economist at ING Bank Manila, said the downtrend last month confirms that inflation reverted to deceleration mode after May’s blip to 3.2 percent.

Mapa said the Bangko Sentral ng Pilipinas (BSP) is seen slashing rates further on Aug. 8 after hitting the pause button last June 20 to assess the impact of previous monetary actions including the rate cut last May 9 and the reduction in the level of deposits banks are required to keep with the central bank.

“Back in June, BSP opted for a prudent pause as it judged it best to confirm that price trends had resumed its downward path. With inflation within target and falling, we expect the central bank to cut policy rates at the Aug.  8 meeting with the inflation path safeguarded in 2019 and 2020 all the while seeing growth momentum underperform its potential and fall below the six to seven percent growth target for the year,” he said.

After slashing benchmark rates last May, the BSP also lowered the reserve requirement ratio by 200 basis points for big and mid-sized banks and by 100 basis points for small banks freeing up about P210 billion in additional funds to boost economic activity.

Mapa said the RRR reductions carried out in May, June and July had not filtered through to the real economy just yet.

“We expect the BSP to monitor the impact of its initial round of RRR reductions before announcing additional cuts.  The decision point to cut RRR further is dependent on whether the influx of liquidity is indeed channeled to increase lending and not simply returning to the BSP’s liquidity management facilities,” he said. 

Inflation averaged 3.4 percent in the first semester of the year after hitting a 22-month low of 2.7 percent in June from 3.2 percent in May.

Inflation accelerated to 5.2 percent last year from 2.7 percent in 2017 and exceeded the BSP’s two to four percent target due to elevated oil and food prices as well as a weak peso.

This paved the way to a tightening cycle that saw interest rates rise by 175 basis points between May and November to anchor inflation expectations.

“Last year we saw how supply bottlenecks, rising crude oil prices and market sentiment had fueled forced inflation well above the two to four percent target band,” Mapa said

He said 2019 features improved supply side conditions, benign inflation environment and well telegraphed communication from the BSP, all helping anchor both inflation expectations.