Tame fuel prices ease inflation worries

Monetary authorities may turn less aggressive in mopping up liquidity in the system given the prospect of easing oil prices in international markets that reduces the need to keep inflation in check through demand curbs.

First Metro Investments Corp. (FMIC) in a report on Monday said domestic risks still needed close monitoring, particularly the cost of rice and other food commodities, to ensure that consumer prices remain stable.

The threat of excess liquidity, which has been a major concern for the Bangko Sentral ng Pilipinas (BSP) since July of last year when money growth reached record levels month after month, may start to abate.

“As monetary authorities have tightened policy further with the increase in SDA (special deposit account) rates, we should see a rapid deceleration in money growth by the third quarter,” FMIC said in its monthly Market Call report.

“Given the likely softening of crude oil prices, the BSP may add only another 25 basis points on SDA rates before the end of the year,” the report read.

At its last three policy meetings, the Monetary Board moved to mop up from the economy cash that may lead to excess demand and drive prices up.

In April and May, banks were told to increase deposit reserves, and in June, rates for SDAs were hiked from record lows to encourage lenders to keep more money idle in BSP vaults.

These moves came as inflation for the year rose over 4 percent or above the midpoint of the BSP’s 3-to-5-percent target range.

Inflation peaked at 4.5 percent—the highest in 30 months—before easing slightly to 4.4 percent in June. The average for the first semester was 4.2 percent.

The acceleration from last year’s 3 percent was mainly driven by high oil prices due to geopolitical tensions abroad, as well as the tight supply of food locally due to the extensive damage Typhoon “Yolanda” caused to crops.

“Inflation may have peaked in May as crude oil prices have begun to ease late June,” FMIC said.