Despite a slight uptick, the 3.2 percent inflation for May remains to be within the government’s target while coinciding well within the latest 2.8 to 3.6 forecast range of the Bangko Sentral ng Pilipinas (BSP) .
BSP Governor Benjamin Diokno expressed his confidence that price pressures will continue to moderate in the succeeding months.
“One data point does not constitute a trend. That’s elementary,” Diokno said in a text message.
“Looking ahead, we expect inflation to be in the neighborhood of two percent in the third quarter of 2019. With world oil prices easing, we expect the annual inflation rate to be in the vicinity of three percent in 2019 and 2020,” he added.
BSP Deputy Governor Diwa Guinigundo attributed this development to the observed incline in both food prices and cost of utilities, to which he noted to be “generally temporary.”
“Two major factors were behind this acceleration of inflation for May. One is higher food inflation particularly fish, fruits and vegetables due to the continuing dry conditions. And two, utilities including housing also contributed to the uptick,” Guinigundo said in a text message.
“The only risk is when the uptick gets prolonged and starts generating second round effects and higher inflationary expectations especially in the face of the heavy catch up on public spending on infrastructure in the second half,” he added.
At the Rizal Commercial Banking Corp., lead economist Michael Ricafort owed the slight increase in inflation to the same factor while noting on the resumption of its decline in the near-term.
“Inflation rate in the coming months of 2019 may likely resume its easing trend largely due to the bigger inflation denominator/base effects. Any further increase in rice imports with the removal of volume limits on imported rice under the Rice Tariffication Law may lead to higher local supply of rice,” Ricafort said noting on the increased supply to contribute in declining price pressures as it accounts for about a tenth of the inflation basket.
RRR cut still on, timing remains of the essence
In terms of the execution of the reserve requirement ratio (RRR) cuts for banks, Guinigundo said that it will remain on the table, echoing the BSP chief’s earlier commitment to reduce RRR.
“On RRR, the Governor has been quite categorical that the goal to reduce it to lower levels stays but the pace of the reduction will be governed by both data and evidence,” the BSP executive said.
“So BSP will continue to monitor key developments and indicators to guide the next steps moving forward,” he added.
Union Bank of the Philippines chief economist Carlo Asuncion shared the same sentiment as he noted on the central bank’s data dependence and its commitment to proper timing.
“With regard to further RRR cuts, timing will be very critical. BSP would need more data moving forward particularly on medium- to longer-term global oil prices,” Asuncion said.
According to the analyst, should inflation print for May had been lower, they would have expected a 25 basis point cut in key policy rates by the third quarter or even within the second quarter but with this outcome, they now see this outlook to manifest in the last quarter of 2019.