Inflation to ease below 2% in Q3

MANILA, Philippines — Inflation is seen easing further below two percent in the third quarter and the first quarter of next year due to the slump in crude oil prices as well as the expected global economic recession amid the coronavirus pandemic, according to the Bangko Sentral ng Pilipinas (BSP).

Dennis Lapid, director of the BSP’s Department for Economic Research (DER), said in a virtual press briefing inflation is seen decelerating below the central bank’s two to four percent target range in the third quarter this year and the first quarter of 2021.

“The assessment is that the overall risks seem to weigh toward the downside for the inflation forecast. So the key factors that will push down inflation for this year and also for next year have to do with a steeper slowdown in key economic activity and also a weaker prospect for domestic economic activity,” Lapid said.

He explained weaker global economic activity would lead to sharper decline in tourism receipts as well as trade and remittances that could be a downward influence on the country’s gross domestic product (GDP) growth.

Furthermore, Lapid added the possibility of a longer imposition of containment measures like the enhanced community quarantine could exert a downward pressure on economic activity as well.

President Duterte has extended the enhanced community quarantine in the National Capital Region and nearby provinces by two more weeks or until May 15 instead of lifting it by April 30 as the confirmed cases of the coronavirus disease 2019 (COVID-19) continue to rise.

Lapid pointed out monetary authorities are not completely ruling out any problems or spikes in inflation this year.

“Some of the upward risks that we are seeing are mostly linked to food prices,” Lapid said.

These, Lapid added, include higher import prices for rice because of the weather disruption in the region because of dry conditions in major rice-producing countries in ASEAN, some impact of African swine fever on meat prices as well as potential production disruption and logistical bottlenecks or temporary shortages in supply.

Inflation averaged 2.7 percent in the first quarter of the year after easing to 2.5 percent in March from 2.6 percent in February.

After easing further in the third quarter this year and the first quarter of next year, Lapid said inflation is expected to gradually pick up towards the two to four percent target range starting the second quarter of next year.

BSP assistant governor Iluminada Sicat told reporters inflation is seen averaging 2.2 percent in 2020 and 2.4 percent in 2021 as risks to inflation outlook further shifted to the downside.

Dubai crude oil prices is now expected to average $10.8 per barrel for 2020 and $14.93 per barrel for 2020 versus the original forecast of $31.56 per barrel for this year and $29.22 per barrel for next year.

Likewise, Sicat added global economic prospects have weakened further due to the impact of the spread of COVID-19 with the International Monetary Fund (IMF) now expecting the world economy contracting by three percent this year assuming the pandemic would fade in the second half of the year.

“We are closely monitoring developments in the domestic and global fronts,” Sicat said.

In his opening remarks during the Q1 2020 BSP inflation report press briefing, BSP Governor Benjamin Diokno said monetary authorities continue to undertake a proactive policy response by easing our monetary policy settings to cushion the country’s growth momentum and uplift market confidence.

“The Philippines saw a difficult start to 2020, with the eruption of Taal Volcano in January and the beginning of the novel coronavirus outbreak in February. By mid March, the COVID-19 crisis had turned into a full-scale pandemic, prompting governments and central banks around the world to deploy measures to limit the spread of the virus and mitigate its adverse impact on households and businesses,” Diokno said.

Aside from cutting interest rates by 125 basis points so far this year to support domestic activity and boost market sentiment, Diokno said the BSP has reduced the reserve requirement ratio by 200 basis points, reduced temporarily the term deposit facility (TDF) auction volumes, and adopted various regulatory relief measures to ensure sufficient domestic liquidity in the financial system and lower borrowing costs for affected firms and households.

The BSP also adopted extraordinary liquidity measures such as the P300-billion repurchase agreement with the Bureau of the Treasury and the purchase of government securities from banks in the secondary market to help shore up market confidence and support the national government’s initiatives to fight COVID-19.