August inflation hits record low of 0.6%

Impending risks that threaten to destabilize consumer prices may keep the central bank from touching policy levers for the rest of the year, with officials confident that current settings can provide enough space for the economy to grow.

The pace of consumer price increases declined to a new record low in August due to the availability of cheap fuel and lower utility and transport costs relative to year-ago levels.

While this provides space for interest rate cuts, the Bangko Sentral ng Pilipinas (BSP) is seen staying cautious.

“The need for monetary policy stimulus to spur economic growth is low for now, with promising drivers of growth in the second quarter sustaining the pace of growth or gaining momentum in second half,” said Joey Cuyegkeng, ING’s economist in Manila.

On Friday, the government said inflation dipped to 0.6 percent in August, breaking the previous record low of 0.8 percent posted in July. August’s result was within analysts’ forecasts, and near the middle of the BSP’s projected range for the month of 0.2 to 1 percent.

The BSP’s main task is to protect the consumers’ purchasing power by keeping the price of goods stable. This is done through adjustments in interest rates, which affect the premiums that banks ask for when lending to households and businesses.

Domestic liquidity, or the amount of money circulating in the economy, is also managed by the BSP using other tools such as its special deposit account (SDA) window and the proportion of bank deposits that lenders are required to keep idle.

BSP Governor Amando M. Tetangco Jr. yesterday said monetary authorities were watching developments in global oil prices and the possible effects of the El Niño phenomenon on inflation. Dryer weather caused by El Niño can affect crop production, which would in turn drive up food prices.

Power rates may also rise as a  result of El Niño, given the country’s partial reliance on electricity generated by hydroelectric plants.
Tetangco said the BSP would coordinate with “relevant agencies of government on mitigates to El Niño’s adverse impact.”

“We’re also mindful of global developments and their effects on domestic liquidity,” Tetangco said. Changes in investor behavior can lead to more money either entering or exiting the Philippines in the form of investments, which can affect the nation’s money supply.

Excess cash in the economy can spur demand and lead to higher inflation, while the inverse can keep prices down at the expense of stunting economic activity.

“We will make adjustments to policy, if needed, to ensure just enough liquidity in the market so the favorable inflation path is sustained,” Tetangco said. The BSP wants to keep inflation within a range of 2 to 4 percent this year.

ING’s Cuyegkeng said there should be little reason for worry, despite record low inflation because the economy had been growing at a steady pace. “Liquidity remains adequate with corporate bond issuances attracting significant interest and liquidity,” he said.