Slowing inflation seen to support lower rates

MANILA, Philippines — The further deceleration in growth of consumer prices in August supports expectations of a further policy rate cut before the end of the year, said London-based Capital Economics.

In a research brief over the weekend, the macroeconomy research firm  said the deceleration of the headline inflation rate to a three year low of 1.7 percent in August is likely to ease further over the next few months mainly because of falling food prices.

“The drop in inflation below the central bank’s (BSP), two percent to four percent target supports our view that interest rates will be cut late this year after BSP Governor Benjamin Diokno described the drop in inflation as ‘excellent news indeed,” the think tank said. 

Capital Economics expects another 25 basis point reduction in policy rates before the end of the year.

Diokno himself recently said a 25 bps cut was feasible before the end of the year as the low inflation environment will allow the central bank to inject more liquidity into the economy.

The headline inflation rate for the month eased from 2.4 percent in July and 6.4 percent in August 2018, the slowest since October 2016.

This brings the year-to-date average to three percent, well within the two percent to four percent target range of the government for the year.

This is also within the forecast of the Bangko Sentral ng Pilipinas (BSP) of 1.3 percent up to 2.1 percent for the month.

National Statistician Dennis Mapa said the headline rate could slow down further in the coming months, stabilizing at around two percent, taking into consideration possible shocks and the upcoming holiday season.

Significant slowdowns were seen in the indices of food and non-alcoholic beverages; housing, water, electricity, and gas; health; recreation and culture; restaurant and miscellaneous goods and services; as well as transport.