Inflation seen back to 2-4% range in mid-2019

Price increases are expected to ease in the coming months but the peso is seen dropping to 58:$1 next year amid a ballooning current-account deficit, London-based Capital Economics said.

“One of the reasons we believe Thursday’s rate hike in the Philippines will be the last in the current tightening cycle is that inflation is likely to fall back sharply over the coming months. We think a combination of falling global oil prices, easing food price inflation and improving base effects will see the headline rate of inflation drop back to within the central bank’s (Bangko Sentral ng Pilipinas) 2-4 percent target range by the middle of next year,” Capital Economics senior Asia economist Gareth Leather and Asia economist Alex Holmes said in a Nov. 16 report titled “Philippines: Inflation to drop, external risks building.”

Amid elevated headline inflation, the BSP’s highest policy-making body, the Monetary Board, again raised interest rates by 25 basis points, bringing the key policy rate to 4.75 percent after a total of 175 basis points increase so far this year.

But for Capital Economics, “since Thursday’s decision, the BSP has dropped further hints that it is considering ending its tightening cycle,” citing Deputy Governor Diwa Guinigundo’s “increasingly confident” statement that inflation would fall.

Guinigundo last week said that “price expectations will go down … they will significantly go down,” thus giving the BSP “the flexibility to digest the recent rate hikes,” Capital Economics noted.

Year-on-year Inflation remained at an over-nine year high of 6.7 percent in October, although the month-on-month rate of increase slowed to 0.3 percent that month, reflecting easing price pressures after the government allowed more importation of food items to boost domestic supply.

However, Capital Economics said that “while worries about inflation are starting to ease, the BSP cannot afford to take its eye off the ball, with current account figures due on Monday likely to show the deficit continuing to widen.”

“As a relatively undeveloped economy, it makes sense for the Philippines to be importing capital from abroad. However, a sudden shift in the current account from surplus to a small deficit has made the country more vulnerable to sudden shifts in global sentiment and has been a key reason behind the sharp fall in the peso this year,” Capital Economics said.