BPI sees inflation rate settling at 3.4% in 2020

CEBU, Philippines — Given the early economic disturbances, the Bank of Philippine Island (BPI) forecasted an average of 3.4 percent inflation rate for 2020.

“Despite the recent decline in oil prices, our outlook for inflation is still the same. If the novel coronavirus (nCoV) crisis is resolved in the first quarter, oil prices may climb in the coming months together with the recovery in China. Furthermore, most of the favorable base effects from rice tariffication may disappear in 2Q 2020. Given these possibilities, our average inflation forecast for FY2020 is still at 3.4 percent,” said BPI lead economist Jun Neri.

The annual inflation rate in the Philippines rose to 2.9 percent in January 2020 from 2.5 percent in the previous month and above market expectations of 2.8 percent. It was the highest inflation rate since May last year, as prices advanced further for food and non-alcoholic beverages (2.2% vs 1.7% in December), reflecting disruptions caused by the Taal volcano eruption and lingering effects of typhoons on crops; housing & utilities (2.5% vs 1.9%); transport (3% vs 2.2%) and alcoholic beverages & tobacco (19.2% vs 18.4%), after the implementation on January 1st of an excise tax hike on alcohol, tobacco and fuels.

Meanwhile, cost of restaurants and miscellaneous goods & services slowed (2.6% vs 2.7%). Also, inflation was steady for furnishing & routine maintenance (at 3.1%); health (at 2.9%); and communication (at 0.4%). On a monthly basis, consumer prices rose 0.6 percent, after a 0.7 percent gain in December.

“We continue to see favorable base effects from rice, still a result of rice tariffication. However, most of this may disappear in the second quarter and rice prices may normalize. An upside risk to this is the drought in Thailand and Vietnam, which could lead to higher rice prices in the coming months,” Neri explained.

According to Neri, with inflation still below 3 percent level, the Bangko Sentral Ng Pilipinas (BSP) may cut its policy rate by 25 bps in its February policy meeting. Governor Diokno said recently that 50 bps cut is still on the table given the likelihood of within target inflation this year. However, a follow through RRP cut may be more challenging given the upside risks to inflation emanating from the possibility of higher rice prices and the implementation of excise taxes.

Depreciation pressures from portfolio outflows, lower tourism receipts, and potential slowdown in remittances may also prevent the BSP from cutting all the way down to 3%. As we have said before, the risk of significant portfolio outflow is high when inflation is above the policy rate.

Inflation is a quantitative measure of the rate at which the average price level of a basket of selected goods and services in an economy increases over a period of time. It is the constant rise in the general level of prices where a unit of currency buys less than it did in prior periods.

Often expressed as a percentage, inflation indicates a decrease in the purchasing power of a nation’s currency.