DUTCH financial giant ING has slashed its projection for the average rise in consumer prices this year, given the continuing collapse in the cost of fuel in international markets.
The steep decline in fuel prices has yet to be factored into government forecasts for inflation, allowing monetary authorities to keep key rates steady, ING pointed out in a recent note.
“Monetary policy guidance continues to support the peso, while the outlook for the timing of US monetary policy tightening has been pushed back,” ING Manila economist Joey Cuyegkeng said this week.
The peso, he said, was one of the region’s best performers last week, posting an almost 1 percent week-on-week appreciation, which allowed it to break below the support of the long-standing trading range.
ING expects inflation to average at 2.8 percent this year—lower than the previous projection of 3 percent. The new forecast is within the Bangko Sentral ng Pilipinas (BSP) target of 2 to 4 percent for 2015.
Also contributing to low inflation is the reduction in utility rates, which will be implemented in January and February. Prices of grains have also gone down, although they remain higher than those seen in the same time last year.
Liquidity conditions are also expected to support a benign inflation environment. Latest data from the BSP showed that domestic liquidity, or M3, growth slowed to 9 percent from 15.4 percent the month before. Month-on-month, M3 was down by 1.2 percent.
“M3 growth is unlikely to generate inflation pressures,” Cuyegkeng said.
The BSP’s overnight borrowing and lending rates currently stand at 4 and 6 percent, respectively.