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Low inflation seen to persist until 2016

Benign impact of El Niño, weak crude oil prices
/ 01:02 AM October 12, 2015

THE PHILIPPINES is seen maintaining a low inflation rate regime and undershoot targets through 2016 on muted global commodity prices and benign impact of the El Niño dryspell, an economist from JP Morgan said.

With global commodity prices remaining weak and the expectation that food prices will remain similarly benign despite the El Niño effect, the trajectory for inflation looks set to be modest through 2015 and likely to come in at 0.4-0.6 percent year-on-year in the fourth quarter this year, JP Morgan chief Southeast Asian economist Sin Ben Ong said in a research note dated Oct. 6.

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JP Morgan has also revised down its 2016 inflation forecast for the Philippines to 1.3 percent from 1.8 percent year-on-year.

“One of the concerns in the Philippines this year had been the impact of El Niño on domestic food prices, especially of rice and so far, it has been surprisingly benign,” Ong said.

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The El Niño dryspell has been forecast to recur this year after the last episode in 2009, raising concerns on prospective disruptions to growth and inflation prospects in the Philippines and other Asian neighbors. As the phenomenon triggers higher temperatures and droughts, economists earlier warned on the impact of severe weather shocks to growth, inflation, energy and food prices.

But given the relatively modest impact so far and “disinflation” coming from commodity prices, Ong said JP Morgan had revised down the trajectory for 2016 inflation.

Disinflation refers to a situation of slowing rate of price inflation. It is used to describe cases when the inflation rate has reduced marginally over the short term, suggesting a slower pace of increase in consumer prices.

By the fourth quarter of 2016, inflation in the Philippines is expected to reach 1.8 percent year-on-year from 2.4 percent previously, thereby undershooting the Bangko Sentral ng Pilipinas’ (BSP) 2-4 percent official target range for the medium term.

“Aside from inflation, the focus for the central bank will be on managing its introduction of the interest rate corridor in the second quarter 2016,” Ong said.

Under the interest rate corridor system, the central bank will set minimum and maximum rates for long- and short-term funds and adjust the rates in response to how much liquidity is required by the economy. Such a system helps the central bank maintain rates at levels consistent with its desired monetary policy stance while curbing short-term interest rate volatility.

The SDA rate is thus seen providing the floor to such a corridor and the overnight borrowing rate, the ceiling.

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“In the interim, the BSP’s policy rate settings are expected to remain on hold in view of the still buoyant domestic demand conditions in the face of soft price pressures,” Ong said.

In September, the country’s inflation rate eased to 0.4 percent, lower than the market consensus of 0.6 percent. This brought the nine-month inflation rate average to 1.6 percent.

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TAGS: BSP, Business, crude oil, economy, El Niño, Inflation, Price
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