Slower inflation seen in October

MANILA, Philippines–Consumer price increases in October may have slowed down to their lowest average pace in nearly a year due to lower food and fuel prices, the central bank reported yesterday.

Previous adjustments in monetary policy settings, which mopped up excess liquidity from the economy, may have also contributed to an easing in inflation. The Bangko Sentral ng Pilipinas (BSP) is now more confident than ever that inflation targets for this year all the way to 2016 would be met.

With inflation easing, the main concern now would be the US Federal Reserve’s next move. Adjustments from the US Fed have been upsetting global financial markets since the second quarter of last year. Officials are expected to finally announce the end of its ultra-cheap money policies this week.

“The focus is likely to be on the guidance of policy rate adjustments,” said Joey Cuyegkeng, economist at ING Bank’s office in Manila.

BSP Governor Amando M. Tetangco Jr. on Tuesday said inflation in October likely averaged between 3.7 and 4.6 percent, compared with September’s 4.4 percent and the peak of 4.9 percent in July and August. As of September, inflation for the year averaged 4.4 percent.

If inflation falls to the low end of the BSP’s projection, it would be the slowest since November of 2013.

Tetangco said monetary authorities were confident that consumer price increases would stay within the target range of 3 to 5 percent this year. Targets for 2015 and 2016, set at 2 to 4 percent, were also secure for now, he said.

Cuyegkeng said financial markets have their sights trained on the Fed’s statement to come out later this month as it announces the likely end of its massive bond-buying program known as quantitative easing.

“If market expectations of a late 2015 rate hike timetable is retained, then the BSP has leeway to keep policy rates steady into the first quarter (of next year),” he said in a note to clients. A Fed rate hike would cause a repatriation of foreign capital from countries like the Philippines back to the United States as investors seek safer bets.

At its last monetary policy meeting, the BSP kept interest rates on hold and left other levers untouched, citing easing inflation.

Tetangco attributed the slowing inflation to the recent drop in fuel prices in international markets. The price of oil has fallen by about a quarter since the start of the year amid weak demand from major economies. Prices of Dubai crude—Asia’s benchmark—fell to $86.61 a barrel last Friday from $87.051 the week before.

Food prices, which rose as a result of storm damage to farmlands and congestion at Manila’s ports, have also declined as the agriculture sector recovers. Manila City’s truck ban, which caused port congestion in Manila, has also been lifted.

“Improved supply of key food commodities on account of more favorable weather conditions and higher imports will sustain the easing of price pressures,” Tetangco said.

Past adjustments to policy settings would also likely continue to help stabilize prices. This year the BSP has asked banks to set aside more of their clients’ cash as reserves. Yields on Special Deposit Accounts (SDA) were also raised. Both moves seek to encourage banks to keep more money idle in BSP vaults.

The central bank’s overnight borrowing rate was also hiked by half a percentage point.

Monetary authorities’ main goal is to keep prices stable to protect the peso’s purchasing power. This is done by influencing the amount of cash lent out by banks to the public and by controlling the amount of money circulating in the economy.

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