ING sees inflation easing

MANILA, Philippines — Dutch financial giant ING expects inflation to decelerate starting this month and return to within the two to four percent target set by the Bangko Sentral ng Pilipinas (BSP) as early as next month as supply conditions ease.

ING Bank Manila senior economist Nicholas Mapa said inflation may ease in the coming months even if crude oil prices are now at levels last seen in 2018.

“Although upside risks to the overall inflation outlook remain, with global energy prices reflecting expectations for an eventual economic recovery, we note other nuances to domestic inflation that could help slow price gains as early as June and return inflation back to within target by as early as July,” Mapa said.

Inflation averaged 4.4 percent in the first five months, staying flat at 4.5 percent from March to May after hitting a year-high of 4.7 percent in February due to supply side constraints.

“However, despite our expectation that inflation will revert to target in the second half, we still expect inflationary pressures to remain at large with only a marginal chance inflation will be closer to the bottom-end of the BSP’s two to four percent inflation target,” he said.

Mapa said demand-side pressure on inflation has remained largely absent as the Philippines struggles through a five-quarter-long recession.

“We aren’t convinced that a further reopening of the economy would immediately translate to demand-side pressure and faster inflation from it,” Mapa said.

Mapa said incomes would remain depressed in the near to medium-term as the National Economic and Development Authority (NEDA) expects unemployment rate to stay between seven and nine percent over the next two years.

He also said a gradual reopening of the economy may even help cap inflationary gains as minimum health standards are relaxed.

“Given the still relatively tight supply conditions that translate to susceptibility for food and energy security, we, however, do not expect inflation to revert to prints lower than three percent in the near term,” he said.

Mapa also said the possibility of a five percent inflation remain remote for now.

Given expectations for slowing inflation, ING expects the BSP to continue providing enough policy support to help resuscitate bank lending while still ensuring that any demand side inflation pressures remain at bay.

“Thus, we reiterate our forecast for an extended pause from the BSP until at least the second half of 2022 barring any severe supply side shock that would jar inflation expectations and foment unwanted second round effects,” he said.

The BSP’s Monetary Board has kept interest rates at record lows since a surprise 25- basis- point cut in November last year.