Inflation falls to 20-year low

Inflation slowed sharply in May to its weakest pace on record due to cheap fuel and the relative stability in the country’s food supply, government documents released Friday showed.

The Bangko Sentral ng Pilipinas (BSP) said it would consider May’s data to see if adjustments in monetary policy settings were warranted, given that inflation fell below the official target range.

Below-target inflation may push the central bank to cut interest rates to fuel economic demand and bring price movements back to the preferred pace. A cut in rates may also aid in the country’s recovery after a disappointing economic growth in the first quarter.

For the month of May, consumer prices rose by an average 1.6 percent, the slowest on record, based on government data up to 1995. The BSP last month projected inflation would fall within a range of 1.6 to 2.4 percent. Analysts polled by the Inquirer gave projections ranging from 1.9 to 2.2 percent.

Core inflation, which excludes selected volatile food and energy prices, slid further to 2.2 percent from 2.5 percent in April 2015 and 3.1 percent in May 2014. Core inflation in the first five months of 2015 averaged 2.5 percent.

“We will consider all these during our next policy meeting to see if there is need to adjust the stance of monetary policy,” BSP Governor Amando M. Tetangco Jr. said in a statement.

The BSP’s main goal is to protect consumers’ purchasing power by keeping prices stable. This is done through adjustments in interest rates, which influence the cost of money in the economy. The central bank also manages the amount of money circulating in the economy using various tools.

Moves by the central bank also has effects on economic activity since monetary policy helps control the amount of money that businesses and consumers can spend. For 2015, the BSP wants to keep inflation within a range of 2 to 4 percent.

“A prolonged period of inflation below target could raise risks of a one-off cut,” Barclays bank economist Rahul Bajoria said in a note to clients.

Tetangco said inflation expectations continued to be “well-anchored.” Growth, albeit slower than expected, also remained solid, he said.

Earlier this week, Tetangco said it was too early to abandon the government’s gross domestic product (GDP) growth target of 7 to 8 percent of this year. In the first quarter, growth slowed to 5.2 percent, which means the economy would have to expand north of 7 percent for the rest of the year for the annual goal to be met.

Tetangco yesterday said there were still plenty of factors that could change the trajectory of domestic inflation. For one, fuel may continue to rise. A prolonged episode of El Niño, which results in dryer weather across the country, may also affect food production and drive prices up.